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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options

A trader buys a call option with strike Rs 500 for a premium of Rs 12 and simultaneously buys a put option on the same share with the same strike and expiry for a premium of Rs 8. What are the break-even prices at expiry of this long straddle?

The break-evens are Rs 480 and Rs 520. A long straddle costs the combined premium of Rs 20, so the share must move at least Rs 20 above or below the Rs 500 strike at expiry for the trader to profit.

  1. ARs 480 and Rs 520Correct
  2. BRs 488 and Rs 512
  3. CRs 492 and Rs 508
  4. DRs 500 only

Explanation

Total premium paid = 12 + 8 = Rs 20. Upper break-even = 500 + 20 = Rs 520 and lower break-even = 500 - 20 = Rs 480. Using only one premium (Rs 12 or Rs 8) would give the wrong levels.

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