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 up by $1 (use negative number if value decreases). Keep answer in 4 decimal.

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, so loss when stock goes up.

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

= 50 * 0.5 * -1

= -25

As long on call, so profit when stock goes up.

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 decrease in value by $20