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

An investor holds shares bought at Rs 800 and buys a put with strike 780 for a premium of Rs 20. What is the maximum loss per share on this protective put position?

The maximum loss is Rs 40 per share. The shares can lose Rs 20 from 800 down to the put strike of 780, after which the put protects. Adding the Rs 20 premium paid for the put gives a total worst-case loss of Rs 40.

  1. ARs 20
  2. BRs 40Correct
  3. CRs 780
  4. DRs 0

Explanation

If the price falls below 780, the put offsets further losses. Loss on shares down to 780 is 20, plus the premium of 20, giving a maximum loss of 40 per share. Rs 20 ignores either the premium or the fall to the strike.

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