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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

An investor buys a call option on a stock with a strike of Rs 1,200 by paying a premium of Rs 30. What is the break-even price at expiry, and what is the maximum loss per share?

Break-even for the long call is the strike plus premium, Rs 1,230, and the maximum loss is limited to the premium paid, Rs 30 per share, incurred if the stock closes at or below Rs 1,200 at expiry.

  1. ABreak-even Rs 1,230; maximum loss Rs 30Correct
  2. BBreak-even Rs 1,170; maximum loss Rs 30
  3. CBreak-even Rs 1,230; maximum loss unlimited
  4. DBreak-even Rs 1,200; maximum loss Rs 1,200

Explanation

For a long call, break-even = strike + premium = 1,200 + 30 = Rs 1,230. The buyer's loss is capped at the premium paid, Rs 30, if the price at expiry is at or below the strike. Rs 1,170 subtracts the premium, which applies to a put, not a call.

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