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

An investor buys a stock at Rs 500 and sells a call option on it with strike Rs 520, receiving a premium of Rs 15. What is the maximum profit per share from this covered call position if held to expiry?

The maximum profit is Rs 35 per share. The stock can gain up to the Rs 520 strike, which is Rs 20 above the purchase price, and the Rs 15 premium received is added. Beyond the strike, further gains are given up.

  1. ARs 15
  2. BRs 20
  3. CRs 35Correct
  4. DUnlimited

Explanation

Maximum profit occurs when the stock is at or above 520 at expiry. Gain on stock = 520 - 500 = 20, plus premium 15, giving 35. Rs 15 ignores the stock gain, and Rs 20 ignores the premium. Profit is capped because the call is sold, so it is not unlimited.

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