Question

Suppose you simultaneously purchase ExxonMobil Stock at a price of $90 per share and sell 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

The strike price of call option = 100.

Since you are selling the above option, the share price should not exceed 100 in order to get an option premium.

In case of share price exceeds 100, the seller will pay the buyer of the option but it will be hedged through the purchase of a share.

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.

Hence at

Stock Price Profit

98 (98-90) + 1.254 = 9.254

99 (99-90) + 1.254 = 10.254

100 (100 - 90) + 1.254 = 11.254

101 (101-90) + 1.254 + (100-101) = 11.254

You will get max profit of 11.254 when the share price will be greater than or equal to 100.

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