A You sell a short put option 100 shares Total premium 310

A. You sell a short put option = 100 shares

Total premium = $3,100.

Strike price = $30

final stock price = $95

What is your profit or loss?

B.You sell a short call option = 100 shares

Total premium = $2,900.

Strike price = $40

final stock price = $165

What is your profit or loss?

Solution

A. We have sold a short put option of 100 shares for $3,100. So, Premium earned is $3,100. This means we are obligated to buy these shares in case the buyer exercises the rights.

Since the Final stock price of $95 is more than the strike price of $30, the person who has bought this option will not exercise this option. This is because the person who bought this option expected that the final stock price to be below $30 but contradictory, the price shoots to $95.

Total profit is the premium of $3,100.

B. We have sold a short call option of 100 shares for $2,900. So, the premium earned is $2,900. This means we are obligated to sell these shares in case the buyer exercises the option. Since the final stock of $165 is more than the strike price of $40, the person who must have bought this option will exercise the option. This is because, the person who bought this option expected the price to rise above $40 and favourably, the price shoots to $165.

Thus, we have to sell these 100 shares for $40 each when the price is $165 per share.

Loss on sale is ($165-$40)*100 ie. $12,500

Premium already received is $2,900

Final loss is $9,600($12,500-$2,900)