Question

Suppose that you sell CDT short at $23 and at the same time you write a call option on CDT with a strike price of $15 and a premium of $2. What is the combined profit or loss on the two positions together if just prior to expiration of the call option the price of CDT is $21? Assume that you cover your short position (meaning you get rid of the short position) just prior to the time of option expiration.

Answer 1

Cash $23 Flow Noul poesen! on selling CDT on writing a call Total Onflow $ 2 $25 Cash Flow at the time of Expity Hath to out flow on purchase of coT@$21 Obligation on call ($21-$15** Total out flow 1 Loss ($27 - $25) = $2 Since CDT is sold now we need to purchase to honour the obligation since $oT is $21 call buyer will exercise the ophon & I