Call option/20000 ounces of gold question

I was wondering about this at the end of afternoon session. If a call option loses value, does the short gain money? There were two questions about whether someone who has a covered call gains if the call option loses money? "If volatility decreases, the short position has a A. Gain B. Loss C. Doesn’t change.

I originally put gain for the first 2 questions, but then changed it to C. Originally I was thinking of time value but then I thought about the premium he collected up front. I probably was right the first time.

He is short an option. Think about an option being worth 5 when you sell it. You get \$5 and you are short an option worth \$5. You didn’t make or loose money. Then that option is worth only \$3. So you are short only an option that is worth \$3. When you want to even your position you have to rebuy it for \$3 while you sold it for \$5. Making you \$2. So when a short option decreases in value you make a profit.

bpdulog Wrote: ------------------------------------------------------- > I originally put gain for the first 2 questions, > but then changed it to C. Originally I was > thinking of time value but then I thought about > the premium he collected up front. I probably was > right the first time. You were the first time. You pick up theta and gamma as time decreases if you sell the option

yes, You should think form position point of view. position A: Gold \$5*20000 ounces=+\$100000 Hedge -(0.537 *20000*\$5+Gamma*20000*\$5) and vega had no material influence

Overall result is gain

^^ correct, I do this for a living, didn’t even bother reading the passage lol

Gamma wasn’t taken into account for the answers given. Since Gamma was quite small, regardless in your formula you should divide Gamma by 2. Since for everyone 1% rise your delta rises with gamma. However, it doesn’t jump to that new delta level but gradually rises there. Linear approximation for calculating the effect on the value of the option is Gamma/2.

yes these 2 options q’s were gain/gain.

Wow I’m seriously gonna kick myself in the a\$\$ right now, I just blew 2 ponits.

bannisja Wrote: ------------------------------------------------------- > yes these 2 options q’s were gain/gain. cool thats what i put too! i was so tired by the time i got to this question i didnt know if i was thinking straight when i got gain/gain.

I remember it was: as time pass, all else equal I put gain. vol increase, all else equal: I put loss. later, it ask combine position A with inventory gold, what is the combined position when gold price increase to 1005(original 1000). delta is 0.75? should total combined position be: 5*20000-0.75*5? but did question give the premium of call option when they sold it? bannisja Wrote: ------------------------------------------------------- > yes these 2 options q’s were gain/gain.

i think they gave the delta of like .539 or something. it was a 100k gain combined with a 53,900 loss on the hedge, so answer was 47,100 or 43,600 or whatever that one was. i messed this one up. 2nd question asked if vol decreases not increases. hence the gain- you were short the call. derivs is one area i think i did pretty well, either 9 or 10/12 i think.

5 - (.539)(5) = 2.305 x 20000 = 46,100

HA!!! A COMPLETE guess for me. Hope you are right!

How about the 6 X 12 at expiration? 10,000 20,000 or 41,000

Whew I dodged a couple of bullets. I originally put gain/no change thinking I would at least pick up 1 point, but I said forget it I’m going with my intuition and put gain/gain. Also I put 43,600 on net position of holding gold inventory & short calls.

I cant exactly remember the question I got (my paper is 6161 so there are differences), but I got one which said something like “what happens to the value of the position consisting of both inventory and the options when there is a sudden decrease in gold price”. my answer was that the overall portfolio value will drop cos the drop in price of inventory will be greater than the increase in short ooption value as delta for the option is <1. waht do u all think?

I went A 10k on that but the was a large element of guesswork in that! I was 5151 by the way.

Looking at rstewart’s post I think I did somethign similar for one of my questions…it went something like what is the change in portfolio value when the price of gold goes up by \$5. the delta i had was different though - mine was .537