CMA Final · Strategic Financial Management · Options
A trader buys one share of Sutlej Cement at ₹500, buys a put with strike ₹480 for ₹12, and sells a call with strike ₹540 for ₹9. Per share, what are the maximum possible profit and maximum possible loss of this combined position at expiry?
Maximum profit is ₹37 and maximum loss is ₹23. This is a collar: net premium paid is ₹3. Upside is capped at 540, giving 40 less 3 = 37; downside is floored at 480, giving a 20 loss plus 3 = 23.
- AMaximum profit ₹37; maximum loss ₹23Correct
- BMaximum profit ₹40; maximum loss ₹20
- CMaximum profit ₹43; maximum loss ₹17
- DMaximum profit ₹37; maximum loss ₹20
Explanation
Net premium paid = 12 - 9 = ₹3. Above 540 the share gain is capped at 540 - 500 = 40, so max profit = 40 - 3 = ₹37. Below 480 the put protects: loss = 500 - 480 = 20 plus premium 3 = ₹23. Option with loss 20 ignores the net premium.
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