NISM Certifications · NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options
An investor buys a stock at Rs 800 and writes a call with strike Rs 850 for a premium of Rs 25 (covered call). What is the maximum profit per share and the breakeven price at expiry?
Maximum profit is Rs 75 per share and breakeven is Rs 775. The premium of Rs 25 lowers the cost to Rs 775, and profit is capped at the strike Rs 850 giving 850 minus 775, equal to Rs 75.
- AMaximum profit Rs 75; breakeven Rs 775Correct
- BMaximum profit Rs 50; breakeven Rs 800
- CMaximum profit Rs 25; breakeven Rs 775
- DMaximum profit Rs 75; breakeven Rs 825
Explanation
Breakeven = 800 - 25 = Rs 775. Maximum profit occurs at or above 850: stock gain 50 plus premium 25 = Rs 75. Rs 50 ignores the premium; Rs 825 adds the premium wrongly.
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