NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Options
An investor writes a call option with strike Rs 800 and receives a premium of Rs 25. What is the break-even price at expiry for the writer, and what is the writer's maximum profit per share?
The break-even is Rs 825 and the maximum profit is Rs 25. The call writer keeps the premium of Rs 25 if the price stays at or below Rs 800, and the gains are wiped out once the price rises above strike plus premium, which is Rs 825.
- ABreak-even Rs 775; maximum profit Rs 25
- BBreak-even Rs 825; maximum profit Rs 25Correct
- CBreak-even Rs 825; maximum profit unlimited
- DBreak-even Rs 775; maximum profit unlimited
Explanation
A call writer profits while the spot stays below strike plus premium, so break-even = 800 + 25 = Rs 825. The maximum profit is the premium received, Rs 25, earned if the spot is at or below 800. Loss is unlimited above break-even. Rs 775 would be the break-even for a put writer.
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