NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
An investor buys one lot of a Nifty call option and pays a premium of Rs 120 per unit. The lot size is 50 units. What is the maximum loss the buyer can suffer on this position, ignoring transaction costs?
The maximum loss is Rs 6,000. An option buyer can lose only the premium paid, which is Rs 120 per unit multiplied by the lot size of 50 units. The loss cannot go beyond this because the buyer is not obliged to exercise the option.
- ARs 6,000Correct
- BRs 12,000
- CUnlimited
- DRs 120
Explanation
The maximum loss of an option buyer is the premium paid. Premium of Rs 120 x 50 units = Rs 6,000. Rs 120 is only the per-unit premium, so it is wrong, and the loss is not unlimited because the buyer has the right but not the obligation to exercise.
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