A protective put on an existing holding
Series X-A case study · set 2, case 5 of 9 · 5 questions · 1 mark each
Question 1 of 5Case practice
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The case · stays here for all 5 questions
Milan already owns 100 shares bought at ₹500 each. To limit downside over the next month, he buys puts covering exactly those 100 shares, with strike ₹480 and premium ₹12 per share. Assume European-style exercise at expiry and cash-settled payoffs for this exercise. Ignore transaction costs, taxes and any dividend. Consider two possible expiry share prices: ₹430 and ₹540. The position consists only of the shares and the purchased puts. No call is sold. Total profit must include both the initial share cost and the option premium. Contract size here is a fictional assumption, not an exchange specification.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Milan already owns 100 shares bought at ₹500 each. To limit downside over the next month, he buys puts covering exactly those 100 shares, with strike ₹480 and premium ₹12 per share. Assume European-style exercise at expiry and cash-settled payoffs for this exercise. Ignore transaction costs, taxes and any dividend. Consider two possible expiry share prices: ₹430 and ₹540. The position consists only of the shares and the purchased puts. No call is sold. Total profit must include both the initial share cost and the option premium. Contract size here is a fictional assumption, not an exchange specification.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1What is the total premium paid for the protection?
Option A. ₹1,200 — Correct answer
Option B. ₹12
Why it is wrong: This is the premium per share.
Option C. ₹50,000
Why it is wrong: This is the initial share cost.
Option D. ₹4,800
Why it is wrong: This confuses the strike with a premium base.
Answer: A. 100 × ₹12 = ₹1,200. Remember: Option premiums scale with the number of units covered.
Hint, shown before you answer in practice mode: Multiply premium per share by covered shares.
XA-S2-C05-Q1easynumerical
Q2At an expiry share price of ₹430, what is the total put payoff?
Option A. ₹7,000
Why it is wrong: This measures the share loss from purchase price.
Option B. ₹0
Why it is wrong: The put is in the money because ₹430 is below ₹480.
Option C. ₹5,000 — Correct answer
Option D. ₹3,800
Why it is wrong: This is put profit after premium, not gross payoff.
Answer: C. 100 × max(₹480 − ₹430, 0) = ₹5,000. Remember: Distinguish option payoff from option profit after premium.
Hint, shown before you answer in practice mode: A put payoff per share is the positive difference between strike and expiry price.
XA-S2-C05-Q2mediumnumerical
Q3At ₹430, what is the total profit or loss on shares plus puts?
Option A. A loss of ₹7,000
Why it is wrong: This ignores the protection.
Option B. A gain of ₹5,000
Why it is wrong: This counts put payoff but ignores the shares and premium.
Option C. A loss of ₹2,000
Why it is wrong: This omits the premium paid.
Option D. A loss of ₹3,200 — Correct answer
Answer: D. 100 × (₹430 − ₹500) + ₹5,000 − ₹1,200 = −₹3,200. Remember: A protective put limits losses but its premium remains a cost.
Hint, shown before you answer in practice mode: Add share profit and put payoff, then subtract premium.
XA-S2-C05-Q3mediumnumerical
Q4At ₹540, what is total position profit?
Option A. ₹4,000
Why it is wrong: This omits the premium.
Option B. −₹1,200
Why it is wrong: This ignores the share gain.
Option C. ₹6,000
Why it is wrong: This wrongly gives the put a positive payoff above its strike.
Option D. ₹2,800 — Correct answer
Answer: D. 100 × (₹540 − ₹500) − ₹1,200 = ₹2,800. Remember: Purchased downside protection reduces the upside by its premium.
Hint, shown before you answer in practice mode: The put expires without value when the share exceeds its strike.
XA-S2-C05-Q4mediumnumerical
Q5What is the maximum expiry loss under the case assumptions?
Option A. ₹3,200 — Correct answer
Option B. ₹50,000
Why it is wrong: This ignores the put protection.
Option C. Unlimited
Why it is wrong: Both the asset and purchased put have defined downside in this position.
Option D. ₹1,200
Why it is wrong: This ignores the ₹20 difference between share cost and put strike.
Answer: A. Per-share maximum loss = ₹500 − ₹480 + ₹12 = ₹32. For 100 shares it is ₹3,200. Remember: A protective-put floor must be compared with the complete initial cost.
Hint, shown before you answer in practice mode: Below the strike, the stock value plus put payoff stays at the strike per share.
XA-S2-C05-Q5mediumnumerical
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