Series 7 Exam Question 98: Answer and Explanation

Question: 98

Sharlet R. bought 100 shares of GHI at $40 and bought 1 GHI May 40 put for 6. What is the maximum potential gain?

• A. $600
• B. $2,400
• C. $3,600
• D. Unlimited

Correct Answer: D

Explanation:

D. Although you can put this in an options chart, in this case, it's not necessary. Sharlet purchased 100 shares of GHI at $40. On that transaction alone, her maximum potential gain is unlimited because there is no limit as to how high the stock can go. She then purchased a protective put (protects her if the stock price decreases) for $6 per share. This adjusts her cost basis to $46 per share ($40 + $6) but does not limit her upside potential.