Question

A customer purchases 1 XYZ July 50 call @ 5. The customer will breakeven at which of the following market prices for the underlying security?[A] 5[B] 45[C] 50[D] 55

Answer 1

Answer:

(D) 55

Explanation:

For the purchase of 1 XYZ July 50 call @ 5, the customer has already paid a call premium of $5 (indicated by the @5).

The exercise price of the call is $50, meaning the call option gives the customer the right to buy XYZ at $50.

Thus, the customer will break even when the market price of XYZ = the exercise price + the premium

= 50 + 5 = 55.

At that market price ($55), the customer would pay a total of $5 premium, plus an exercise price of $50, which equals $55 (same as the market price.