Practice Question
You write one JNJ put with strike price $70, for a premium of $5. Ignoring transactions costs, what is the breakeven price of this position?
A) $65 B) $75 C) $5 D) $70 E) None of these is correct
Step 1: Understand the Position
- You are writing a put, which means you are selling the right for someone else to sell you the stock at the strike price.
- You receive a premium of $5 per share.
- The strike price is $70.
Step 2: Apply the Breakeven Formula
The breakeven price for writing a put is calculated using: \[ \text{Breakeven Price} = \text{Strike Price} - \text{Premium Received} \] Substituting the values: \[ \text{Breakeven Price} = 70 - 5 = 65 \]
Step 3: Interpret the Result
- If the stock drops below $65, you incur a net loss.
- If the stock stays above $65, you profit from the premium.
Conclusion: The breakeven price is $65, so the correct answer is A).