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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

A client sells a put option on a stock at a strike of Rs 800 and receives a premium of Rs 30. Ignoring costs, at which stock price at expiry does the seller break even, and what is the maximum profit per share?

The break-even is Rs 770 and the maximum profit is Rs 30 per share. A put seller keeps the premium if the stock stays at or above the strike, and starts losing when the price falls below strike minus premium, which is 800 minus 30.

  1. ABreak-even Rs 830; maximum profit Rs 30
  2. BBreak-even Rs 770; maximum profit Rs 770
  3. CBreak-even Rs 770; maximum profit Rs 30Correct
  4. DBreak-even Rs 830; maximum profit unlimited

Explanation

A put seller loses once the price falls below strike less premium: 800 - 30 = Rs 770, which is the break-even. The maximum profit is limited to the premium received, Rs 30, earned if the stock is at or above 800. Break-even of 830 is the call-seller formula, wrongly applied.

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