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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options

An investor buys a Nifty call option with strike 22,000 at a premium of Rs 150 and simultaneously buys a Nifty put option with the same strike and expiry at a premium of Rs 130. Ignoring costs, what are the upper and lower break-even points at expiry?

The break-evens are 22,280 and 21,720. A long straddle costs a total premium of Rs 280 (150 plus 130), and the index must move that amount above or below the 22,000 strike at expiry for the position to recover its cost.

  1. A22,280 and 21,720Correct
  2. B22,150 and 21,870
  3. C22,280 and 21,870
  4. D22,150 and 21,720

Explanation

This is a long straddle. Total premium paid = 150 + 130 = 280. Upper break-even = 22,000 + 280 = 22,280. Lower break-even = 22,000 - 280 = 21,720. Using only one premium each gives the wrong values in other options.

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