Question

A call option on the SGD with a strike price of 0.73 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 0.89 USD/SGD, with a 1 penny bid-ask spread, what is your net profit on this position?

Answer 1

Strike price (K) of call option = 0.73 USD/SGD

maturity = 6 months

option premium bid price = 0.07 USD

when I sell these options on 10,000 SGD,

I will recieve the option premium bid price

Total premium recieved = 0.07*10,000 = 700 USD

At maturity . bid price of SGD = 0.89 USD/SGD

Ask price - bid price = 1 penny = 0.01 USD

Ask price = 0.01+ 0.89 = 0.90 USD

The ask price is the price buyers will have to pay to buy SGD

since ask price > Strike Price

The call option buyer will exercise the option

Loss on the exercise of option = (ask price - strike price )*10000 = (0.9 - 0.73 )* 10,000 = 1700

Net loss to the seller of option = premium recieved - Loss on the exercise of option = 700 - 1700 = -1000 USD

Loss to seller = 1000 USD