Derivatives

sanbiz20
Finance Junkie
Posts: 53
Joined: Sat Apr 01, 2017 2:12 pm

Derivatives

Postby sanbiz20 » Tue Sep 26, 2017 4:15 am

Q Suppose both a call option and a put option have been written on a stock with a exercise price of Rs 50. The Current stock price is Rs 52, and the call & put premiums are Rs 3 & 1 respectively.

Calculate the profit to long & short positions for both the put & call with expiration day price at Rs 45.

Solution/Doubt
In this question I have a doubt in calculating the profit/loss for the short call position.

The short call profit should be Rs3-0 = Rs 3 (without taking the current stock price into account)
or should it be Rs 3-Rs7= -Rs 4 as a loss.(taking the current stock price into account)

Kindly comment. Also please advice what is the use of the Current stock price provided here in this question?

edupristine
Finance Junkie
Posts: 890
Joined: Wed Apr 09, 2014 6:28 am

Re: Derivatives

Postby edupristine » Tue Sep 26, 2017 8:57 am

Since this is not a question of covered call strategy, so the profit/loss will be restricted to Rs.3 for Call option
Long Call = -3 (Loss)
Short Call= +3 (Gain)

The current market price is given just to confuse you. It should not be taken into consideration.


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