Question

Suppose you are short 50 contracts on a 2-year 50-call option on TSLA and long 25 contracts on TSLA stock. How much will your option position increase in value if TSLA stock price goes up by $1 (use negative number if value decreases).

Answer 1

Their shall be a decline of $25 in the value of option

Working Notes

For Short Position

Now, short on call option means that the investor is a call seller.He has contracted to sell contract at the already decided exercise price.

So, for a call seller if the future price increases, it shall lead to loss as he shall have to sell the stock at a lower exercise price.

In this case we are short 50- call option and the price goes up by $1

Thus, 50 options * $1, we shall incur a loss of $50

For Long Position

Now, long on call option means that the investor is a call buyer.He has contracted to buy contract at the already decided exercise price.

So, for a call buyer if the future price increases, it shall lead to profit as he shall buy the stock at a lower exercise price.

In this case we are long 25 option and the price goes up by $1

Thus, 25 options * $1, we shall incur a profit of $25

Thus,

Increase / Decrease in option position shall be = loss on short position + profit on long position

= -$50+$25

= - $25

Thus, their is a decrease of $25.