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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options

A trader buys a call with strike Rs 500 at premium Rs 18 and buys a put with the same strike and expiry at premium Rs 12, on the same stock (long straddle). What are the breakeven prices at expiry?

The breakevens are Rs 470 and Rs 530. The long straddle costs a combined premium of Rs 30 (18 plus 12). Adding it to the Rs 500 strike gives the upper breakeven of 530, and subtracting it gives the lower breakeven of 470.

  1. ARs 470 and Rs 530Correct
  2. BRs 482 and Rs 518
  3. CRs 488 and Rs 512
  4. DRs 500 only

Explanation

Total premium paid = 18 + 12 = Rs 30. Upper breakeven = 500 + 30 = 530; lower breakeven = 500 - 30 = 470. Using only one premium gives wrong figures such as 482/518 (using 18) or 488/512 (using 12). A straddle has two breakevens, so a single 500 is wrong.

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