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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options

An investor buys one lot of a stock call option with strike Rs 500 at a premium of Rs 20 and simultaneously buys a put with the same strike and expiry at a premium of Rs 15 (long straddle). Lot size is 100. What is the maximum loss on the position?

The maximum loss is Rs 3,500, which is the total premium paid of Rs 35 per share (20 plus 15) times the lot of 100. It occurs if the stock closes exactly at the strike of Rs 500 and both options expire worthless.

  1. ARs 1,500
  2. BRs 2,000
  3. CRs 3,500Correct
  4. DUnlimited

Explanation

Total premium paid = 20 + 15 = Rs 35 per share. Multiplied by lot size 100 = Rs 3,500. The maximum loss occurs if the stock expires exactly at Rs 500, when both options expire worthless. Break-evens are Rs 465 and Rs 535.

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