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nism-series-xb-protective-put-option-hedging-strategy[ INVESTMENT ADVISER (LEVEL 2) ]

An investor buys a stock at ₹1,500 and buys a Put Option with Strike Price ₹1,450 paying a premium of ₹40 for downside portfolio insurance. What is the Maximum Loss per share and the Upside Breakeven Price?

[ A ]Maximum Loss = ₹90 per share; Upside Breakeven Price = ₹1,540 [ Max Loss = (1,500 - 1,450) + 40 = 90; Breakeven = 1,500 + 40 = 1,540 ][ CORRECT ]
[ B ]Maximum Loss = ₹1,500 (Full stock price loss); Breakeven = ₹1,500
[ C ]Maximum Loss = ₹40; Breakeven = ₹1,450
[ D ]Maximum Loss = Unlimited; Breakeven = ₹1,600
Takeaway

Option A is correct: Maximum Loss = ₹90 per share; Upside Breakeven Price = ₹1,540 [ Max Loss = (1,500 - 1,450) + 40 = 90; Breakeven = 1,500 + 40 = 1,540 ]

Derivation
A protective put establishes a price floor: no matter how far the underlying stock falls, the holder can always exercise the put and sell at the ₹1,450 strike. Maximum loss is the gap between what was paid for the stock and that floor, plus the cost of the insurance itself: (₹1,500 − ₹1,450) + ₹40 premium = ₹90 per share, and this loss is capped regardless of how severely the stock crashes below ₹1,450. On the upside, the stock must first climb back through the ₹50 gap to the strike and then cover the ₹40 premium paid before the position turns net profitable: Breakeven = ₹1,500 + ₹40 = ₹1,540. Above that level, gains flow through dollar-for-dollar just as with unhedged stock ownership, since the put simply expires worthless.
Why the others fail
B — Maximum Loss = ₹1,500 (Full stock price loss); Breakeven = ₹1,500
The put option establishes a hard floor at the ₹1,450 strike, which limits total loss to ₹90 per share regardless of how far the stock price actually crashes.
C — Maximum Loss = ₹40; Breakeven = ₹1,450
Counts only the ₹40 premium, missing the ₹50 gap between the ₹1,500 purchase price and the ₹1,450 strike that also contributes to the maximum loss.
D — Maximum Loss = Unlimited; Breakeven = ₹1,600
The put option strictly bounds downside loss at ₹90 per share; loss is not unlimited, since the holder can always exercise the put at the ₹1,450 floor.