Question

You just purchased a three-month BP call option (exercise price $75) and a three-month BP put option (exercise price $75). The call premium is $6 and the put premium is $2. Your maximum potential loss from this position is ______________. (Assume each contract is for 100 shares of stock) $200 $600 $800 unlimited

Answer 1

Correct option is C.

Maximum potential loss from this position is $800

Step-by-step explanation:

Premium paid for call option = $6 * 100 = $600

Premium paid for put option = $2 * 100 = $200

Total cost = $600 + $200 = $800

In case the price of underlying stock falls below $75, call option will be exercised. If the price rises above $75 cal option would be, exercised. In case price stays at $75, nothing would be done. In any case the amount lost cannot exceed the cost of $800 that has been paid for the options.