Jason is bearish on USBank; so he instructs his broker to sell 15/10/2020 European 1200 call...
Jason is bearish on USBank; so he instructs his broker to sell 15/10/2020 European 1200 call options on USBank with an exercise price of $50 each share. Bill agrees to buy these options and pays the premium of $2 each share.
(a) What will be Jason’s gain or loss, if USBank’s price is $55 each share on 15/10/2020?
(b) What will be Jason’s gain or loss, if USBank’s price is $47 each share on 15/10/2020?
Homework Answers
(a) Jason’s gain or loss, if USBank’s price is $55 each share on 15/10/2020-
In this case, the option will be "in the money" for Mr. Bill because the Exercise price of $ 50 is lower than the price on 15/10/2020 and therefore it will be exercised by Mr. Bill.
The Loss to Mr. Jason will be-
Exercise Price- $50
Price on 15/10/2020- $55
Difference per share= $55-$50 = $5
Less- Option Premium per share= $2
Net Loss to Mr. Jason per share = $3
Therefore, Total net loss to Mr. Jason = $3*1200(No of call options)
= $3600
(b)
In this case, the option will be "out of the money" for Mr. Bill because the Exercise price of $ 50 is higher than the price on 15/10/2020 and it will not be exercised by Mr. Bill. Therefore, Mr. Jason will gain the Option Premium of $2per share.
His gain will be-
Option Premium per share= $2
Net gain to Mr. Jason per share = $2
Therefore, Total net gain to Mr. Jason = $2*1200(No of call options)
= $2400
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