Question

You sold short 1,000 shares of XGN Ltd at $100.00 per share in May 2020. You are now worried about the market turning bullish, so you decide to buy 10 call options on the company's shares with each contract written on 100 shares at an exercise (or strike) price of $100.00 expiring in August 2020 for a premium of $2.00 per share. If at expiration the company's share price is $110.00 calculate the total profit or loss on your hedged position. Show all calculations.

Answer 1

The total profit or loss is computed as shown below:

Loss in case of selling a share is computed as follows:

= Number of shares x (Selling price per share - Price per share at expiration)

= 1,000 x ($ 100 - $ 110)

= - $ 10,000

Profit in case of call option is computed as follows:

= (Price at expiration - Strike price - Premium paid) x Number of contracts x 100 shares

= ($ 110 - $ 100 - $ 2) x 10 x 100

= $ 8,000

So, the total profit or loss will be as follows:

= - $ 10,000 + $ 8,000

= - $ 2,000

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