Ram purchased a 3 month call option for 100 shares in XYZ Ltd. at a premium of ₹ 30 per share, with an exercise price of ₹ 550. He also purchased a 3 months put option for 100 shares of the same company at a premium of ₹

CS Executive · Securities Laws and Capital Markets · PYQS · June 2024
Ram purchased a 3 month call option for 100 shares in XYZ Ltd. at a premium of ₹ 30 per share, with an exercise price of ₹ 550. He also purchased a 3 months put option for 100 shares of the same company at a premium of ₹ 5 per share with an exercise price of ₹ 450. The market price of the share on the date of purchase of option, is ₹ 500. Calculate the profit or loss that Ram would make assuming that the market falls to ₹ 350 at the end of 3 months.

Answer & Explanation:

Since the market price at the end of 3 months falls to ₹ 350 which is below the exercise price under the call option, the call option will not be exercised. Only put option becomes viable. The gain will be: Gain per share (₹ 450 - ₹ 350) ₹ 100 Total gain per 100 shares (₹ 100 x 100) ₹ 10,000 Cost or premium paid (₹ 30 x 100) + (₹ 5 x 100) ₹ 3,500 Net gain ₹ 6,500

Topics: Derivatives Market

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