NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
A client holds 2,000 shares of a company, currently priced at Rs 800. The adviser suggests a protective put with a strike of Rs 780, with a premium of Rs 15 per share. The put is bought for the whole holding (assume lot size matches). What is the maximum loss per share on the combined position up to expiry, ignoring costs?
The maximum loss is Rs 35 per share. The put protects below Rs 780, so the stock can lose Rs 20 from the Rs 800 price, and the Rs 15 premium paid adds to this. Together the worst case is Rs 35 per share.
- ARs 15
- BRs 20
- CRs 35Correct
- DRs 780
Explanation
If the price falls below 780, the put offsets losses below the strike. The stock loses at most 800 - 780 = Rs 20 down to the strike, and the premium paid is Rs 15. Maximum loss = 20 + 15 = Rs 35 per share, or Rs 70,000 in total. Rs 20 forgets the premium and Rs 15 forgets the fall to the strike.
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