Question

1) You own some shares of AMZN in your long term portfolio, currently trading at $1,903, 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 $2,175 and a premium of $11. At expiration, AMZN is trading at $2,073 in the spot market. What is your net profit on this position?

2) There is a great deal of uncertainty in the markets about the future prospects of XYZ company. You decide to buy a straddle on XYZ, buying 300 shares each of put and a call option with a strike price of $117. The put is trading at $4.3 and the call is trading at $4.4. At maturity, XYZ is priced at $107.8. What is your net profit on this position?

Answer 1

1) No. of AMZN shares sold = 200

3 month call option sold with the premium of $11

In case selling options, seller receives the premium

Premium received = premium per share * no. of shares

= $11 * 200

=$2200

Strike price of sold call options is $ 2175

Spot price at expire is $2073

As the spot price at expire is less than the strike price, the call buyer will not exercise the option (as he is in loss and he is having right but nor obligation to exercise), so seller receives only premium as profit.

So profit from this options = $2200

2) In straddle, call and put on the same expire with same strike price is bought, so

Premium paid for call buy = Call premium * no. of shares

= $4.4 * 300

= $1320

Similarly premium paid for put buy = $4.3 * 300

= $1290

Total premium paid = $1320 + $1290

= $2610

Strike price of call & put options bought is $117

Spot price at maturity, $107.80

Now as we are in buyer situation in both position, so we will exercise put option only as spot price less than strike price at maturity and we are in profit situation in that & will not exercise call options as spot price less than strike price and we are in loss situation in call.

Profit from put option = (Strike price - spot price) * share

= ($117 - $107.80) * 300

= $9.2 * 300

= $2760

Profit from Call option = 0

Net profit = Profit From call + Profit from put - premium paid

= $0 + $2760 - $2610

= $150