Question

OCT 2020 PUTS - last price 7.90 ; vol - ; strike 28.00

1. You sold twenty Oct 2020 put contracts today at $7.90. Two weeks later the stock trades at $22.30 and the premium on the put is $9.90. How much money have you made or lost at this point in time?

2. Briefly explain whether selling uncovered calls is more, less or of equal risk than selling puts?

Answer 1

1) We have sold put options with strike price of 28 and then we received a premium of 7.90. After 2 weeks price has decreased from 28 to 22.30. Since we had sold the puts, we were bullish on the market. Infact market has gone down, so the price of the put option will increase. As we observe price of put has increased from 7.90 to 9.90. If we were to close the position today we would need to buy the put at 9.90. Effectively we would make (790 - 9.90) i.e -2.00. We have lost 2.00 at this point of time.

2) Uncovered calls means selling a call option without owing the underlying share.

We need to understand the value of call and put to answer the question.

Value of Call at expiration = Stock Price (S)- Strike Price (X) (Where S> X) or 0 (Where X < equal to S)

Value of Put at expiration = Strike Price (X) - Stock Price (S) (Where X < S) or 0 (Where S>equal to X)

Whatever will be the value of option that would be our outflow.

For call option, value increases with increase in stock option above the strike price. As stock price can increase infinitely, there is infinite outflow that can be expected.

For put option, value increases with decrease in stock option with respect to the strike price. As stock price can maximum decrease to nil value, maximum value of put shall be the strike price of the option.

As we observe there can be infinite outflow at maturity due to selling call option and finite outflow at maturity due to selling put option, uncovered call options are more risky then selling put option.