To find the breakeven point on a put spread established at a credit of 2.75, what calculation should be performed?

To find the breakeven point on a put spread established at a credit of 2.75, what calculation should be performed?

• A. Add the credit to the lower strike price
• B. Subtract the net premium from the higher strike price
• C. Multiply the higher strike price by the credit
• D. Add the premium to the higher strike price

Answer: (B)

To determine the breakeven point on a put spread established at a credit of 2.75, the correct calculation involves subtracting the net premium received (in this case, 2.75) from the higher strike price of the puts. In a put spread, you sell a put option at a higher strike price and buy another put option at a lower strike price. The credit received represents the profit you can realize if the options expire worthless or if the stock price stays above the higher strike price. The breakeven point is where the profit from the premium received equals the intrinsic value of the spread. By subtracting the credit from the higher strike price, you accurately identify the stock price at which there is neither profit nor loss. If the stock price drops below this breakeven point, the loss on the spread starts to exceed the initial credit received. This is a key concept in options trading, where understanding how to calculate breakeven points helps traders assess risk and make informed decisions about their positions.

To determine the breakeven point on a put spread established at a credit of 2.75, the correct calculation involves subtracting the net premium received (in this case, 2.75) from the higher strike price of the puts.

In a put spread, you sell a put option at a higher strike price and buy another put option at a lower strike price. The credit received represents the profit you can realize if the options expire worthless or if the stock price stays above the higher strike price. The breakeven point is where the profit from the premium received equals the intrinsic value of the spread.

By subtracting the credit from the higher strike price, you accurately identify the stock price at which there is neither profit nor loss. If the stock price drops below this breakeven point, the loss on the spread starts to exceed the initial credit received.

This is a key concept in options trading, where understanding how to calculate breakeven points helps traders assess risk and make informed decisions about their positions.