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One complete free lesson for SIDC Exam Module 18: Securities and Derivatives Trading (Products and Analysis). No account or payment needed.
Combine an equity holding with a hypothetical put to calculate protected expiry value, maximum loss, and premium-adjusted breakeven.
An investor in an original Module Eighteen illustration buys one hundred fictional shares at forty ringgit each. At the same time, the investor buys European put protection with a strike of thirty eight, covering exactly those shares, for two ringgit per share. Ignore dividends, fees, financing, and counterparty failure. If the share price falls to thirty at expiry, what is the combined loss? The question connects equity ownership with derivatives analysis: the answer requires both the put's expiry payoff and the premium paid for protection.
The shares cost four thousand ringgit. The put premium adds two hundred, so the combined initial outlay is four thousand two hundred. A put gives its holder the right to sell at the strike under the contract's exercise terms. For this simplified expiry valuation, its economic payoff per share is the greater of thirty eight minus the ending share price, or zero. We value that payoff together with the shares; we do not treat the strike as a promise to reimburse every part of the original outlay.
At an expiry share price of thirty ringgit, the shares are worth three thousand. Each put-covered share has eight ringgit of exercise value because thirty eight exceeds thirty by eight. Across one hundred shares, the put contributes eight hundred. The combined value is therefore three thousand eight hundred. Compared with the initial four thousand two hundred outlay, the loss is four hundred. Below the strike, further share price declines increase the put payoff by the same amount, keeping this simplified expiry value at the floor.
The floor is thirty eight ringgit per share of combined expiry value, while the total entry cost is forty two. That difference gives a maximum loss of four ringgit per protected share under our assumptions. On the upside, at a share price of fifty, the put expires worthless and the shares are worth five thousand. Net profit is eight hundred after the total outlay. Breakeven is forty two, not forty: above the strike, share appreciation must first recover the two ringgit protection premium.
Suppose the shares finish at forty one ringgit. The put expires without value because selling at thirty eight would be unattractive. The shares are worth four thousand one hundred, leaving a one hundred ringgit loss against the combined initial outlay. The share price rose by one ringgit, yet the strategy lost money because protection cost two. This is not a failure of the floor. It shows that a protected position can sacrifice some upside return while still delivering the downside protection purchased.
When shares and options appear together, calculate their combined ending value and compare it with every initial cash outflow. Keep three quantities separate: the protection strike, the maximum loss including premium, and the profit breakeven. This lesson uses European protection held to expiry with exactly matched share coverage. Selling earlier introduces market values affected by remaining time and volatility. The transferable skill is to evaluate the whole position under explicit assumptions, rather than calling an investment safe merely because an option has been added.
Aligned to the SIDC July–December 2026 study outline. Independent teaching with original examples; this focused lesson does not cover the entire syllabus.
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Exam Syllabus
ordinary shares | preference shares | warrants | exchange-traded funds
bonds | sukuk | money market instruments | yield analysis
futures | options | structured warrants | index derivatives
chart patterns | trend analysis | financial ratios | industry analysis
cash equity strategies | hedging | spread trading | portfolio rebalancing
portfolio diversification | market risk | liquidity risk | credit risk
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