NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
An investor buys a call option on a stock at a strike of Rs 500 paying a premium of Rs 20. At expiry the stock settles at Rs 535. What is the investor's net profit per share?
The net profit is Rs 15 per share. The call is worth its intrinsic value of Rs 35 (535 minus 500) at expiry, and subtracting the Rs 20 premium paid leaves Rs 15. Quoting Rs 35 would ignore the premium cost.
- ARs 35
- BRs 15Correct
- CRs 55
- DRs 20 loss
Explanation
Intrinsic value at expiry = 535 - 500 = Rs 35. Net profit = 35 - premium 20 = Rs 15. Rs 35 ignores premium paid; Rs 55 adds the premium instead of subtracting it.
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