Short Calls P/L Flashcards
Short K=$70 Call
S=$63 and Premium=$3
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = $3.
Full Explanation:
You have sold an option that obligates you to sell shares of stock worth S=$63 for K=$70 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$70.
From your counterparty’s perspective, there is no way to make money by paying $70 for shares only worth $63. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).
Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $3 premium your counterparty paid you. P/L = $3 (per share).
Short K=$82 Call
S=$89 and Premium=$4
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = -$3.
Full Explanation:
You have sold an option that obligates you to sell shares of stock worth S=$89 for only K=$82 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$82.
By purchasing your shares worth $89 for only $82 (a discount of $7), your counterparty can make $7 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $7 for its owner.
We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$82. This will cause a loss for you of $7. For example, if you own the shares, you will have to sell them for $7 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $89 and sell them for $7 less. Either way, you are $7 poorer than you would be if your counterparty hadn’t exercised the option. (Correspondingly, they are $7 richer. The IV of the option is both your loss and their gain.)
Offsetting the $7 loss from selling the shares, you also received a premium of $4. Your final per-share premium is P/L = $4 - $7 = -$3.
(For comparison, your counterparty’s final P/L is $3. As always, one party’s gain is the other party’s loss.)
Short K=$80 Call
S=$83 and Premium=$4
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = $1.
Full Explanation:
You have sold an option that obligates you to sell shares of stock worth S=$83 for only K=$80 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$80.
By purchasing your shares worth $83 for only $80 (a discount of $3), your counterparty can make $3 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $3 for its owner.
We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$80. This will cause a loss for you of $3. For example, if you own the shares, you will have to sell them for $3 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $83 and sell them for $3 less. Either way, you are $3 poorer than you would be if your counterparty hadn’t exercised the option. (Correspondingly, they are $3 richer. The IV of the option is both your loss and their gain.)
Offsetting the $3 loss from selling the shares, you also received a premium of $4. Your final per-share premium is P/L = $4 - $3 = $1.
(For comparison, your counterparty’s final P/L is -$1. As always, one party’s gain is the other party’s loss.)
Short K=$67 Call
S=$66 and Premium=$2
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = $2.
Full Explanation:
You have sold an option that obligates you to sell shares of stock worth S=$66 for K=$67 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$67.
From your counterparty’s perspective, there is no way to make money by paying $67 for shares only worth $66. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).
Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $2 premium your counterparty paid you. P/L = $2 (per share).
