Question

A call option on the SGD with a strike price of 0.74 USD/SGD and a maturity of 6 months has a premium bid price of 0.1 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 0.82 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

here strike price = 0.74$ = 1 SGD

Selling option means seller will be under obligation to sell 1 SGD if buyer of call exercies the oprtion. Now buyer will exercise option only if it is cost more than 0.74$ to buy it

Seller of call option will get premium i.e. 0.1 USD

At maturity quoted price is 0.82$ = 1SGD

Thus one would exercise the option as one can buy 1 SGD at 0.74$ instead of 0.82$

Thus seller of loss will suffer loss of 0.82-0.74 = 0.08$

Thus net profit is premium received less loss on exercise

=0.1-0.08

=0.02 per SGD

Thus total profit = 0.02*10,000 = 200 $