Question

At date t, a trader buys a bear spread using two European put options on the same stock. The date t stock price is $35 per share. Both put options have the same expiration date, T. The first put option is priced at $2.43 per share and has a strike price equal to $35 per share. The second put option is priced at $0.68 per share and has a strike price equal to $30 per share. At date T, what is the break-even stock price per share

Answer 1

$33.25

Step-by-step explanation:

The break-even point is calculated as: Higher strike price - Initial cost.

Initial cost = Cost of buying the higher strike price put option - Amount earned by selling the lower strike put option

Initial cost = $2.43 - $0.68

Initial cost = $1.75 per share

Break-even point = Higher strike price - Initial cost

Break-even point = $35 - $1.75

Break-even point = $33.25