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

An investor owns a stock bought at Rs 400 and writes a call with strike Rs 420 receiving a premium of Rs 15 per share. Ignoring costs, what is the maximum profit per share and the breakeven price at expiry?

Maximum profit is Rs 35 per share and breakeven is Rs 385. The stock gain up to the Rs 420 strike is Rs 20, plus the Rs 15 premium received. The premium cushions the purchase price, lowering breakeven to Rs 385.

  1. ARs 35 maximum profit; breakeven Rs 385Correct
  2. BRs 15 maximum profit; breakeven Rs 415
  3. CRs 35 maximum profit; breakeven Rs 415
  4. DRs 20 maximum profit; breakeven Rs 385

Explanation

In a covered call, maximum profit = (strike - purchase price) + premium = 20 + 15 = 35, reached when the price is at or above 420. Breakeven = purchase price - premium = 400 - 15 = 385. Rs 415 wrongly adds the premium to the cost.

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