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

An investor holds a stock bought at Rs 400 and sells a call with strike Rs 420 for a premium of Rs 15 (a covered call). What is the maximum profit per share at expiry and the breakeven price?

Maximum profit is Rs 35 per share and breakeven is Rs 385. The stock gain up to the strike is Rs 20, plus the Rs 15 premium received. The premium cushions the purchase price of Rs 400 down to Rs 385.

  1. AMaximum profit Rs 35; breakeven Rs 385Correct
  2. BMaximum profit Rs 15; breakeven Rs 415
  3. CMaximum profit Rs 20; breakeven Rs 385
  4. DMaximum profit Rs 35; breakeven Rs 415

Explanation

Maximum profit occurs when the stock is at or above 420: stock gain 20 plus premium 15 = Rs 35. Breakeven = purchase price minus premium = 400 - 15 = Rs 385. Other options misstate the profit or use the wrong breakeven.

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