Question

A writer sells 100 call options with strike $42 for $0.91 each and deposits these premiums in a bank. The calls mature in 30 days, and the bank's interest rate over those 30 days is 5%. At expiry the underlying asset of the call is worth $39 each. At expiry, the writer withdraws all cash from the bank, purchases the necessary amount of shares on the open market and completes the call contract. What is the writer's profit? Give your answer correct to two decimal places, and if the writer makes a loss include a minus sign.

Answer 1

The writer's profit is $84.00. To calculate the writer's profit, you need to consider the premiums collected from selling the call options, the interest earned on those premiums, and the cost of buying the shares to complete the call contract.The premiums collected from selling the call options are:$0.91 x 100 = $91.00The interest earned on those premiums over 30 days at 5% is:($91.00 x 0.05 x 30) / 365 = $0.38The total amount of cash available to the writer at expiry is therefore:$91.00 + $0.38 = $91.38The cost of buying the shares to complete the call contract is:100 x $42 = $4,200.00Since the underlying asset is worth $39 at expiry, the writer can buy the necessary shares for:100 x $39 = $3,900.00The writer's profit is therefore:$91.38 - $3,900.00 = $84.00Since the writer made a profit, the answer is $84.00.

Hope I helped you...