Question

Suppose you are short 50 contracts on a 2-year 50-call option on TSLA and long 10 contracts on TSLA stock. How much will your option position increase in value if TSLA stock price goes down by $1 (use negative number if value decreases).

Answer 1

The Delta of the call is 0.5. It means if stock moves by $1, the call value will move by $0.5.

A person who is short on call will profit from stock price going down and will incur loss when stock price goes up.

As short on call and price goes down, so profit.

1)Value of short 50 call contracts when stock price goes down= (Number of contracts) * (Delta of call) * (Change in stock price)

= 50 * 0.5 * 1

= 25

As long on call and value goes down, so loss

2)Value of long 50 call position = (Number of contracts) * (Delta of call) * (Change in stock price)

= 10 * 0.5 * -1

=-5

Total value = 1 + 2

= 25 - 5

= 20

The position will increase in value by $20