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

Here one has shorted exxonmobil stock at price of $90. Here if price moves down he will be in profit and if price goes up he will be in loss, hence to hedge the loss one has purchased call option with strike price of $100 . Thus loss is limited to $10( 100 -90) plus premium paid for call option

In this position, one will realise maxium profit when price of stock becomes 0

At price of 0 call option will not be exercised

Thus maximum profit = (90 - 0) - premium paid on call

= 90 - 1.254

= 88.746 $