A customer purchases 200 shares of ABC at $49.00 per share. Then the customer sells 2 ABC 50 calls at $2.50. At expiration, what is the customer's break-even point?
$46.50
To find the break-even point, we need to consider the total cost of purchasing the shares and the premium received from selling the call options. The break-even point is calculated by subtracting the total premium received from the purchase price per share.
This choice is correct because the customer purchased shares at $49.00 each and sold call options for a total premium of $5.00 (2 calls at $2.50 each). Thus, the break-even point is $49.00 - $5.00 = $46.50.
This choice is incorrect because it suggests a break-even point that does not account for the total premium received from the call options. If the customer had received only $1.50 in premiums, this value could be plausible, but with $5.00 in premiums, the break-even point is lower.
This choice is incorrect as it implies that the break-even point is higher than the initial purchase price. The break-even point should reflect the premium received, which reduces the overall cost basis of the shares purchased.
This choice is also incorrect as it suggests an increase in the break-even point rather than a decrease. It does not take into account the income generated from selling the call options, which effectively lowers the cost basis of the shares held.
The break-even point is determined by considering both the initial investment in shares and any income from options sold. In this case, after accounting for the $5.00 premium from selling the calls, the break-even point for the shares is correctly calculated as $46.50, allowing the customer to recoup their investment.
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