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

A trader buys one lot of a stock call option with strike Rs 500 at a premium of Rs 20 and sells one lot of the Rs 520 call at a premium of Rs 9, both of the same expiry. The lot size is 1,000. What is the maximum profit on the position at expiry?

The maximum profit is Rs 9,000. The bull call spread costs a net Rs 11 per share and can be worth at most Rs 20, the gap between strikes. Profit is 20 minus 11, which is Rs 9 per share, multiplied by the lot of 1,000.

  1. ARs 9,000Correct
  2. BRs 11,000
  3. CRs 20,000
  4. DRs 31,000

Explanation

This is a bull call spread. Net premium paid = 20 - 9 = Rs 11 per share. Maximum spread value = 520 - 500 = Rs 20. Maximum profit = 20 - 11 = Rs 9 per share, times 1,000 = Rs 9,000. Rs 11,000 is the maximum loss, the net premium paid.

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