NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
An investor buys a call option on a stock with a strike price of Rs 500 by paying a premium of Rs 20. At expiry the stock settles at Rs 540. What is the investor's net profit per share?
The net profit is Rs 20 per share. The call pays Rs 40 at expiry because the stock at 540 exceeds the 500 strike, and after deducting the Rs 20 premium paid upfront, the investor is left with Rs 20.
- ARs 40
- BRs 20Correct
- CRs 60
- DRs 0
Explanation
The call's payoff at expiry is 540 - 500 = Rs 40. Subtracting the premium of Rs 20 paid gives a net profit of Rs 20. Rs 40 ignores the premium paid. Rs 60 wrongly adds the premium.
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