Question

Suppose you simultaneously short ExxonMobil Stock at a price of $90 per share and purchase a one-year call option with strike price of $100 for $1.254. What is the largest profit you can earn on this position?

Answer 1

We know that,

Strike price = 100 (given)

As per concpet,

For a option seller, the share price should not exceed 100 in order to get an option premium.

For a price higher than 100, the seller will become payable to the buyer of the option but it will be compensated by the gain from share purchase.

Share price	Profit
99	(99-90) + 1.254 = 10.254
100	(100 - 90) + 1.254 = 11.254
101	(101-90) + 1.254 + (100-101) = 11.254

The payoff of a call option for the seller = option premium when a call is out of the money and will keep on getting decreases as call option become in the money.

From above table,

You will get max profit of 11.254 at share price >99.

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