Question

S	K	Calls			Puts
		NOV	DEC	JAN	NOV	DEC	JAN
25	20	-	-	7.30	.10	-	.55
25	22.50	3.20	3.40	-	.90	-	1.25
25	25	1.50	-	4.00	1.40	1.95	2.10
25	27.50	.60	.88	-	3.50	-	4.00
25	30	.16	.55	.90	5.10	5.40	5.50

A trader opens the following position:

Buys the stock

Buys two Jan 25 puts

Sells three Jan 30 calls

Based upon this information, what would the breakeven prices be?

Answer 1

Break even price is the point at which there is no profit and loss.

Calculation of Total cost incurred

(1) Buy the stock = $25 (i.e spot price)

(2) Buy 2 Jan 25 puts = 2 * $2.1 per share = $4.2

(3) sell three Jan 30 call = 3 * $ 5.5 = $16.5

Statement showing Break-even Price

Spot price on expiry	Profit/loss on Share bought	Profit/loss on 2 Put bought	profit/loss on 3 calls sell	Net gain/loss
a	b	c	d	e=b+c+d
$20.00	-$5.00	$5.80	$16.50	$17.30
$22.50	-$2.50	$0.80	$16.50	$14.80
$25.00	$0.00	-$4.20	$16.50	$12.30
$27.50	$2.50	-$4.20	$9.00	$7.30
$30.00	$5.00	-$4.20	$1.50	$2.30
$31.00	$6.00	-$4.20	-$1.50	$0.30
$31.15	$6.15	-$4.20	-$1.95	$0.00

Thus, Breakeven Spot price = $ 31.15

NOTES:-

1) Profit/ loss on shares bought (column 2) is calculated by substracting Spot Price with purchase price

2) We will only exercise the put option, when the spot price on expiry date is less than excercise price. In this case our profit will be calculated by following formula- " 2*(Exercise price - spot price) - option premium paid "

If spot price om expiry date is greater than or equal to our strike price then we will not exercise our put option and our total loss on put option will be the option premium paid by us.

3) The call option buyer (i.e the other party) will only exercise the call option, when the spot price on expiry date is more than excercise price. If he exercise the call option, out total loss will be calculated by following formula - " 3* spot price - Exercise price) - option premium received by us "

If spot price on expiry date is less than or equal to our strike price then he will not exercise the call option and our total profit on call option will be the option premium received by us.