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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

An investor buys one call option on a stock with strike Rs 500 at a premium of Rs 20. At expiry the stock settles at Rs 535. What is the investor's net profit per share?

The net profit is Rs 15 per share. The call is worth 535 minus 500, or Rs 35, at expiry, and the buyer paid a premium of Rs 20, so profit is 35 minus 20. Ignoring the premium would wrongly give Rs 35.

  1. ARs 35
  2. BRs 15Correct
  3. CRs 20
  4. DRs 55

Explanation

Intrinsic value at expiry = 535 - 500 = Rs 35. Net profit = 35 - premium 20 = Rs 15. Rs 35 ignores the premium, and Rs 55 wrongly adds it.

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