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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

Mr. Rohan Mehta holds 1,000 shares of an Indian company bought at Rs 500 each. The shares now trade at Rs 600. He fears a short-term fall but does not want to sell. He buys 1,000 put options with a strike of Rs 600 at a premium of Rs 20 per share. At expiry the share price is Rs 520. What is his net position value per share, counting the sale value from exercising the put and the premium paid?

The protective put lets Mr. Mehta sell at the Rs 600 strike even though the market price is Rs 520. After deducting the Rs 20 premium paid, his net realisation is Rs 580 per share.

  1. ARs 520
  2. BRs 600
  3. CRs 580Correct
  4. DRs 620

Explanation

The put is exercised, so he effectively sells at the Rs 600 strike. The premium of Rs 20 is subtracted: 600 - 20 = Rs 580 per share. Rs 600 ignores the premium, Rs 520 ignores the put, and Rs 620 adds the premium instead of deducting it.

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