NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options
A trader writes (sells) one call option at strike Rs 500 for a premium of Rs 15 per share. What is the writer's maximum profit and maximum loss in theory?
The writer's maximum profit is the Rs 15 premium received, while the potential loss is unlimited. The writer gains only if the option expires worthless, but loses more as the underlying price rises above the strike plus premium.
- AMaximum profit Rs 15 per share; loss unlimitedCorrect
- BMaximum profit unlimited; loss Rs 15 per share
- CMaximum profit Rs 500 per share; loss Rs 15 per share
- DMaximum profit Rs 15 per share; loss limited to Rs 485
Explanation
A call writer keeps the premium if the option expires worthless, so profit is capped at Rs 15. If the price rises sharply, losses grow without limit, since there is no cap on the underlying's price.
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