Question

You own some shares of AMZN in your long term portfolio, currently trading at $1,993, and are thinking of getting some extra income by selling covered calls. You sell 200 shares worth of 3 month call options on AMZN, with a strike price of $2,121 and a premium of $12. At expiration, AMZN is trading at $2,024 in the spot market. What is your net profit on this position?

Answer 1

Option is a derivative which gives its holder a right to buy or sell underlying assets but not the obligation on expiration date at specific price. There are two parties of Option -

• Option buyer - who buy option
• Option writer - who sell option

For a Call Option writer, Net Profit or loss can be calculated with following equation -

Net Profit/Loss on Short Call option = - Max ( Assets price on expiry - Strike Price , 0 ) + Call option premium

Given-

Strike Price = $2,121

Call Premium = $ 12

Price on Expiry = $ 2,024

Thus,

Net Profit/Loss on Short Call option = - Max ( 2,024 - 2,121 , 0 ) + 12

Net Profit/Loss on Short Call option = - 0 + 12

Net Profit/Loss on Short Call option = $ 12

Considering each option contains one share of AMZN, No. of option sold = 200

Thus,

Total Profit of this short call position = 200*12 = $ 2,400

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.