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

Rohan holds 1,000 shares of an Indian company, currently priced at Rs 500 each. He buys one put option contract covering 1,000 shares with a strike of Rs 480 by paying a premium of Rs 12 per share. At expiry the share price is Rs 420. What is the net value of his combined position (shares plus put, after premium) per share compared with the purchase price of Rs 500, i.e. his net gain or loss per share?

The net loss is Rs 32 per share. The share falls Rs 80, the put pays Rs 60 at a strike of 480 against 420, and the premium costs Rs 12. This equals the maximum loss of the protective put: Rs 20 below purchase price plus Rs 12 premium.

  1. ALoss of Rs 32 per shareCorrect
  2. BLoss of Rs 80 per share
  3. CLoss of Rs 20 per share
  4. DLoss of Rs 8 per share

Explanation

Share loss = 500 - 420 = Rs 80. Put payoff = 480 - 420 = Rs 60. Premium paid = Rs 12. Net = -80 + 60 - 12 = -Rs 32. Check: maximum loss of a protective put = (500 - 480) + 12 = Rs 32. Rs 80 ignores the put; Rs 20 ignores the premium; Rs 8 wrongly subtracts the premium as a gain.

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