NISM Certifications · NISM-Series-VIII: Equity Derivatives · Sales Practices and Investors Protection Services
A client buys one lot of a stock option with lot size 500 at a premium of Rs 12. The client's broker collects the premium upfront. What is the maximum loss the client can suffer on this long option position?
The maximum loss is Rs 6,000, which is the premium of Rs 12 multiplied by the lot size of 500. An option buyer can never lose more than the premium paid, whereas an option seller faces potentially large losses.
- ARs 12
- BRs 500
- CRs 6,000Correct
- DUnlimited
Explanation
The maximum loss for an option buyer is the premium paid. Premium total = 12 x 500 = Rs 6,000. Rs 12 is only the per-unit premium, and the loss is not unlimited, which applies to an option seller.
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