CFA Practice Question

CFA Practice Question

A call writer with an exercise price of 45 and a premium of 2.50 breaks even when the stock price
A. rises to 47.50.
B. falls to 42.50.
C. remains at 45.
Explanation: A call is exercised when the stock price rises above the exercise price. In this case as the stock price rises above 45, for every increase of 1, the writer loses 1. Since the writer has already received the option premium, he will breakeven when Stock price = Exercise price + option premium = 45 + 2.50 = 47.50

User Contributed Comments 4

User Comment
ontrack although break-even gives the impression that you first invest and then recover
Oarona Yeah, the writer invests 2.50 in this example
mc42086 No he doesn't. A call writer collects premium. B/E point refers to recouping costs or expenses.
nwine12 I thought of this as a covered call.. buy stock at 45 collect 2.50 premium in which case B would be correct
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