Question

A call option on the SGD with a strike price of 0.71 USD/SGD and a maturity of 6 months has a premium bid price of 0.07 USD, and a 1penny bid-ask spread. If you sell these options today on 10,000 SGD, and at maturity the SGD is quoted at bid price of 0.85 USD/SGD, with a 1 penny bid-ask spread, what is your net profit on this position?

Note: pay careful attention to which side of the quote you will be trading with at each step.

Answer 1

The net profit in these kind of scenarios will always be (Premium amount received during sale of the option - Amount of loss incurred due to exercise of the option).

In this given case, Premium amount received on sale of options = 10000*.07 = 700 USD

Loss incurred on exercise of the option = (0.85-0.71)*10000 = 1400 USD

Hence, net loss due to sale of options = 1400-700 = 700 USD.

Since we are selling these options, it is a loss to us. But, had our position been that of a buyer of these options, then we would obtain a profit, and the profit would also be the same i.e 700 USD. The loss for seller of options would be the gain for the buyer and vice versa.