Protective Put Strategy: Downside Floor, Breakeven, and Upside Potential
An investor purchases 300 shares of BioHealth at $64 per share and simultaneously buys 3 BioHealth Jan 60 Puts at $3.50 to protect against negative clinical trial results. What is the investor's breakeven price per share, and what is the maximum loss per share on the position?
In a protective put: Breakeven = Stock Cost + Put Premium ($64 + $3.50 = $67.50). Max Loss = Stock Cost - Put Strike + Premium ($64 - $60 + $3.50 = $7.50).
Complete Analysis & Legal Rationale
The investor paid $64 for the stock plus $3.50 for the insurance put, bringing total cash invested to $67.50 per share (the breakeven price). The put option guarantees the right to sell the stock at $60 regardless of how low BioHealth falls. Maximum Loss = Purchase Price ($64) - Put Strike ($60) + Put Premium ($3.50) = $7.50 per share ($2,250 total on 300 shares). Upside potential remains unlimited.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Properly adds put premium to stock cost for breakeven and calculates downside floor loss of $7.50.
Subtracts premium from strike price, using short option breakeven logic.
Assumes max loss is only the put premium, ignoring the $4.00 drop between stock purchase and put strike.
Assumes the put provides no protection and stock can drop to $0 without put exercise.
Official Standard: Defines married puts and protective put portfolio hedging rules.