Suppose you are short 50 contracts on a 2-year 50-call option on TSLA and long 25 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).
Sol:
Given Short 50 contracts on a 2-year 50-call option.
Long 25 contracts on TSLA stock.
Contract lot size assume to be 100.
To determine how much your option positions will increase in value if stock price goes down by $1:
Shorting 50 call contracts will lead to profit of $1 per contract, as shorting call option means that you are expecting the stock price to go down. So when stock price will go down your short call position will be in profit = (Contract lot size x number of contracts x $1) = (100 x 50 x 1) = $5000
Long 25 contracts will lead to loss of $1 per contract = (100 x 25 x -1) = -$2500
Total Profit = ($5000 - $2500) = $2500
Therefore option positions increase in value if stock price goes down by $1 will be = $2500.
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