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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 12, and simultaneously buys a put option of the same stock with the same strike and expiry at a premium of Rs 8. What are the breakeven prices at expiry?

The breakevens are Rs 480 and Rs 520. The long straddle costs a combined premium of Rs 20, so the stock must move more than Rs 20 either above or below the Rs 500 strike at expiry for the position to make a profit.

  1. ARs 480 and Rs 520Correct
  2. BRs 488 and Rs 512
  3. CRs 492 and Rs 508
  4. DRs 500 only

Explanation

This is a long straddle. Total premium paid = 12 + 8 = Rs 20. Upper breakeven = 500 + 20 = 520; lower breakeven = 500 - 20 = 480. Rs 488/512 uses only the call premium, and Rs 492/508 uses only the put premium.

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