Assume you purchase 200 shares of stock at $90 per share and wish to hedge part

Question

Assume you purchase 200 shares of stock at $90 per share and wish to hedge part of your position by writing a 100 share option. The option has a strike price of 75 and a premium of $6. If at the time of expiration, the stock is selling at the following price $75, what will your overall gain or loss at this selling price? Assume you purchase 200 shares of stock at $90 per share and wish to hedge part of your position by writing a 100 share option. The option has a strike price of 75 and a premium of $6. If at the time of expiration, the stock is selling at the following price $75, what will your overall gain or loss at this selling price?

Explanation / Answer

Option is written of 100 shares.

Premium earned = 6*100=$600.

Since strike price is equal to price at the expiration, option would not be exercised as there is no gain or loss.Strike price and market price both are $75

But we have earned gain of $600 as premium.

If we sell the shares at $75 then loss would be $3,000(15*200)

Net loss in this situation=$3,000-$600=$2,400

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