NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
An investor buys one call option on a stock with a strike price of Rs 500 and pays a premium of Rs 20 per share. Ignoring costs, at what stock price at expiry does the buyer break even?
The breakeven is Rs 520, which is the strike price of Rs 500 plus the premium of Rs 20. Only above this price at expiry does the call buyer start making a net profit after recovering the premium paid.
- ARs 480
- BRs 500
- CRs 520Correct
- DRs 540
Explanation
For a call buyer, breakeven equals strike plus premium: 500 + 20 = Rs 520. Rs 480 results from subtracting the premium, which applies to a put buyer's logic only in reverse. Rs 500 ignores the premium paid.
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