NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A PMS manager sold a put option on a stock at a strike of Rs 250 and received a premium of Rs 12. At expiry the stock closes at Rs 230. What is the manager's net result per share, and what is the break-even price for this position?
The seller loses Rs 8 per share, and break-even is Rs 238. The put is Rs 20 in the money (250 minus 230), offset by the Rs 12 premium received. Break-even equals the strike minus the premium, so 250 minus 12 gives Rs 238.
- ALoss of Rs 8; break-even Rs 262
- BLoss of Rs 20; break-even Rs 238
- CLoss of Rs 8; break-even Rs 238Correct
- DProfit of Rs 12; break-even Rs 250
Explanation
Put seller pays strike minus spot = 250 - 230 = Rs 20 at expiry. Net = 12 received - 20 = loss of Rs 8. Break-even = strike - premium = 250 - 12 = Rs 238; at 230 the seller is below it, consistent with an Rs 8 loss. Rs 262 wrongly adds the premium to the strike.
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