CMA Final · Strategic Financial Management · Options
An investor holds 1,000 shares of Arjun Pharma at ₹500 and writes a covered call of strike ₹540 for a premium of ₹18 per share. What is the maximum profit per share on the position, and at what share price at expiry is the breakeven reached?
The covered call earns a maximum of ₹58 per share, being the ₹40 capital gain up to the strike plus the ₹18 premium. Breakeven is ₹482, the purchase price less the premium received. The premium cushions losses and is not added to cost.
- AMaximum ₹58; breakeven ₹482Correct
- BMaximum ₹40; breakeven ₹518
- CMaximum ₹58; breakeven ₹518
- DMaximum ₹18; breakeven ₹482
Explanation
Maximum profit = (540 − 500) + 18 = ₹58 when the share is at or above 540. Breakeven = cost 500 − premium 18 = ₹482. Option with ₹518 adds the premium instead of subtracting it; ₹40 ignores the premium received.
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