NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
An investor buys a call option on a stock with strike Rs 300 for a premium of Rs 15. Which statement about the position at expiry is correct?
The breakeven price is Rs 315. A call buyer must recover the Rs 15 premium, so the stock must rise to the strike of Rs 300 plus the premium. Loss is limited to the premium, while profit is unlimited.
- AThe breakeven price is Rs 315Correct
- BThe breakeven price is Rs 285
- CThe maximum loss is unlimited
- DThe maximum profit is limited to Rs 15
Explanation
A long call breaks even when the spot equals strike plus premium, i.e. 300 + 15 = Rs 315. Maximum loss is limited to the premium paid and profit is theoretically unlimited, so the other statements are false. Rs 285 would be breakeven for a long put.
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