NISM Certifications · NISM-Series-VIII: Equity Derivatives · Accounting and Taxation
An investor buys a call option on a stock, paying a premium of Rs 20 per share for a lot of 200 shares. The option expires out-of-the-money and lapses worthless. How is the premium treated in the investor's books?
The Rs 4,000 premium (20 x 200) is recognised as a loss on expiry. When a bought option lapses worthless, the premium initially shown as an asset is written off to the profit and loss account, not capitalised or carried forward.
- ARecognised as a loss of Rs 4,000 on expiryCorrect
- BCarried forward as an asset for the next year
- CAdded to the cost of the underlying shares
- DIgnored as it is a capital item
Explanation
Premium paid = 20 x 200 = Rs 4,000. When the option lapses unexercised, the premium paid is recognised as a loss in the profit and loss account on expiry. It is not capitalised or carried forward.
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