I am studying derivatives and I got stock in a question. Can you help me?
An investor buys 10,000 shares of company ABC at R$30.00 each, and later performs a covered sale of 10,000 options with an exercise value of BRL 33.00, receiving a premium of BRL 0.20 per share.
On the exercise date, this share was quoted at R$34.00.
In this way, between buying and selling shares:
a) The investor was exercised, but profited BRL 5,000.00
b) The investor was not exercised and had no gain or loss given the share price on the exercise date
c) The investor was exercised and had no gain or loss given the share price on the exercise date
d) The investor was exercised, but profited BRL 2,000.00
I am trying to do this way:
I considered it’s a PUT.
So, 34 - 33 = 1.
So, 1 * 10000 = 10000
Once it’s a put, it receives the premium. This way, 0.20 * 10000 = 2000
10000 - 2000 = 8000
I think 8000 is the loss, but I don’t see this answers.
This feels like whoever created this question tried to trick everyone by wording it poorly. As he is Long the stock, a covered sale can only be by using calls (Covered Puts are written against a short position in the underlying).
To create a covered call based on writing 10,000 call options requires 1,000,000 shares in the underlying as option have a multiplier of 100. None of the answers really make sense.
The spot at expiration (ST 34) is above the strike (X 33) so the option will be exercised.
The profit at expiration of this covered call (Includes Long Stock + Short Call) is equal to
ST - S0 + (-max(ST-X,0)) + c = 34 - 30 + (-max(34-33,0)) + 0.2 = 4 - 1 + 0.2 = 3.2 per option.
I’m interested in the answer if anyone can make sense of this.
