NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
An investor buys one lot of a stock call option with a strike of Rs 800 and pays a premium of Rs 25 per share. The lot size is 400 shares. What is the breakeven price at expiry and the maximum loss for the buyer?
Breakeven is Rs 825, being strike Rs 800 plus premium Rs 25, and the maximum loss is Rs 10,000, which is the premium of Rs 25 multiplied by 400 shares. A call buyer's loss is limited to the premium paid.
- ABreakeven Rs 775; maximum loss Rs 10,000
- BBreakeven Rs 825; maximum loss Rs 10,000Correct
- CBreakeven Rs 825; maximum loss unlimited
- DBreakeven Rs 800; maximum loss Rs 25
Explanation
Breakeven for a long call = strike + premium = 800 + 25 = Rs 825. Maximum loss is the premium paid = 25 x 400 = Rs 10,000. Rs 775 wrongly subtracts the premium, as for a put.
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