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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

A PMS investor's portfolio manager buys a put option on the Nifty at a strike of 22,000 for a premium of 150 points, as protection for the portfolio. The breakeven level of the Nifty at expiry for this put position, ignoring costs, and the maximum loss on the put per unit are respectively:

The put's breakeven is 21,850, which is the strike of 22,000 less the 150-point premium, and the maximum loss is limited to the 150-point premium. Adding the premium to the strike would apply to a call, not a put.

  1. A22,150 and 150 points
  2. B21,850 and 150 pointsCorrect
  3. C21,850 and 22,000 points
  4. D22,000 and 150 points

Explanation

A long put breaks even at strike minus premium: 22,000 - 150 = 21,850. The most the buyer can lose is the premium paid, 150 points, if the Nifty finishes at or above 22,000. Adding the premium to the strike is the error behind 22,150, which applies to a call.

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