NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
An investor buys a call option on a stock with a strike price of Rs 500 and pays a premium of Rs 20. What is the breakeven price at expiry for the buyer?
The breakeven price is Rs 520. A call buyer must recover the Rs 20 premium, so the stock must reach the strike of Rs 500 plus the premium of Rs 20 at expiry. Above Rs 520 the buyer makes a net profit, and below it a net loss.
- ARs 480
- BRs 500
- CRs 520Correct
- DRs 540
Explanation
For a call buyer, breakeven equals strike plus premium: 500 + 20 = Rs 520. Rs 480 wrongly subtracts the premium, which applies to a put. Rs 500 ignores the premium paid, and Rs 540 doubles the premium.
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