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

An investor holds 1 lot (500 shares) of a stock bought at Rs 400 and sells a call with strike Rs 420 for a premium of Rs 12 (covered call). What is the maximum profit per share, and the break-even price at expiry?

The maximum profit is Rs 32 per share and the break-even is Rs 388. The share gains up to Rs 20 until the strike of 420, plus the Rs 12 premium received, and the premium lowers the effective cost from 400 to 388.

  1. AProfit Rs 32; break-even Rs 388Correct
  2. BProfit Rs 20; break-even Rs 412
  3. CProfit Rs 12; break-even Rs 388
  4. DProfit Rs 32; break-even Rs 412

Explanation

Maximum profit occurs when the stock is at or above 420: gain on share = 20 plus premium 12 = Rs 32. Break-even = purchase price minus premium = 400 - 12 = Rs 388. Rs 412 wrongly adds the premium to the cost.

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