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

Ms. Kavita Menon owns 1,000 shares of a company bought at Rs 800, now trading at Rs 900. She sells one-lot (1,000 shares) 940-strike call options at a premium of Rs 25 to earn income. At expiry the stock closes at Rs 980. Ignoring costs, what is her total profit on this covered call strategy relative to the Rs 900 current price?

Her profit relative to Rs 900 is Rs 65,000. The call is exercised, so she effectively sells at the Rs 940 strike and keeps the Rs 25 premium, realising Rs 965 per share, which is Rs 65 above Rs 900 on 1,000 shares. The upside above 940 is forgone.

  1. ARs 65,000Correct
  2. BRs 40,000
  3. CRs 25,000
  4. DRs 80,000

Explanation

Stock gain from 900 to 980 = Rs 80 per share. Call sold at 940 is exercised: loss = 980 - 940 = Rs 40, offset by premium Rs 25, net option result = -Rs 15. Total per share = 80 - 15 = Rs 65, i.e. Rs 65,000 for 1,000 shares. Check: she effectively sells at 940 plus premium 25 = 965, which is 65 above 900. Rs 80,000 ignores the option loss.

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