Question
In: Finance
You bought 1000 Google Shares for $400 each. You also sold call options on Google...
You bought 1000 Google Shares for $400 each. You also sold call options on Google with a strike of $435 for $20.
a) What is the maximum profit on your position?
b) What is the profit on your position when the stock hits $440?
c) Draw the profit/loss diagram for this position clearly marking the max loss and the maximum profit.
Solutions
Expert Solution
a) If the stock price goes up we will have a profit on Stock position, But after 435 we will have a negative payoff from selling a call option, therefore the benefit from stock will be set off by negative payoff from selling call option
Maximum profit = [(435 - Purchase Price of the Stock) + Option Premium collected on selling call option] x Number of Shares
Maximum profit = [35 + 20] x 1000 = 55000
b) Profit on Stock position = 440 - 400 = 40
Negative payoff from selling call = 435 - 440 = -5
Option premium collected on selling call = +20
Profit from the position = (40 - 5 + 20)x1000 = 55000
c)
| Stock | Stock | Call | Premium collected on call | Profit |
| 345 | -55000 | 0 | 20000 | -35000 |
| 350 | -50000 | 0 | 20000 | -30000 |
| 355 | -45000 | 0 | 20000 | -25000 |
| 360 | -40000 | 0 | 20000 | -20000 |
| 365 | -35000 | 0 | 20000 | -15000 |
| 370 | -30000 | 0 | 20000 | -10000 |
| 375 | -25000 | 0 | 20000 | -5000 |
| 380 | -20000 | 0 | 20000 | 0 |
| 385 | -15000 | 0 | 20000 | 5000 |
| 390 | -10000 | 0 | 20000 | 10000 |
| 395 | -5000 | 0 | 20000 | 15000 |
| 400 | 0 | 0 | 20000 | 20000 |
| 405 | 5000 | 0 | 20000 | 25000 |
| 410 | 10000 | 0 | 20000 | 30000 |
| 415 | 15000 | 0 | 20000 | 35000 |
| 420 | 20000 | 0 | 20000 | 40000 |
| 425 | 25000 | 0 | 20000 | 45000 |
| 430 | 30000 | 0 | 20000 | 50000 |
| 435 | 35000 | 0 | 20000 | 55000 |
| 440 | 40000 | -5000 | 20000 | 55000 |
| 445 | 45000 | -10000 | 20000 | 55000 |
| 450 | 50000 | -15000 | 20000 | 55000 |
| 455 | 55000 | -20000 | 20000 | 55000 |
| 460 | 60000 | -25000 | 20000 | 55000 |
Maximum loss will occur when the stock price is 0 which is calculated below
| Stock | Stock | Call | Premium collected on call | loss |
| 0 | -400000 | 0 | 20000 | -380000 |
jeff jeffy answered 1 year agoRelated Solutions
You bought 1000 Google Shares for $400 each. You also sold call options on Google...
You bought 1000 Google Shares for $400 each. You also sold call
options on Google with a strike of $435
for $20.
a) What is the
maximum profit on your position?
b) What is the profit
on your position when the stock hits $440?
c) Draw the
profit/loss diagram for this position clearly marking the max loss
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