ABT Ltd. is currently trading at $65. An investor buys five ABT July 55 put options for $2each. Ignoring commissions, what price must ABT Ltd. common shares trade at for theinvestor to break even on her put options?
To calculate the break-even price for the put options:
The strike price of the put is $55.
The cost per put option is $2.
For the investor to break even, the stock must fall below the strike price by at least the cost of the option.
Break-even price = Strike price - Cost of the option= $55 - $2 =$53
If ABT Ltd. trades at $53, the investor can sell the stock at $55 using the put and recover the $2 premium paid.
References:
Volume 1, Chapter 10:Derivatives, section on "Options Basics" explains the calculation of break-even prices for options​.
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