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CS Executive · Capital Market and Securities Laws · Basics of Capital Market

Anita buys units of a derivative contract on the NSE that gives her the right, but not the obligation, to buy a stock at a fixed price on or before a future date, for which she pays an upfront premium. What is the maximum loss she can suffer on this position?

Her maximum loss is the premium paid. She holds a long call option, which gives a right without an obligation, so she can let it lapse if unprofitable. Unlimited loss risk belongs to the writer of a call option, not the buyer.

  1. AUnlimited, as the stock price may rise without limit
  2. BThe premium paidCorrect
  3. CThe difference between strike and spot price multiplied by lot size, without any limit
  4. DNil, because she has only a right

Explanation

Anita holds a long call option. A buyer of an option has a right and not an obligation, so if the option is unfavourable she lets it lapse and loses only the premium paid. Unlimited loss applies to option writers (sellers) of calls, and the loss is not nil since the premium is paid.

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