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. Can you guys help me? (I tried)
Numbers are confusing and you are a little lost in translation. And you might just be a little brazilian bot, a robozinho.
As @cesfx has already said, there are losses in translation here - although I think we can make some assumptions. If you're selling options covered by the shares mentioned above, then you're talking about calls - not puts. Also, a single option contract represents 100 shares - so 10,000 options against 10,000 shares makes no sense, since 100 lots (contracts) would cover 10,000 shares. You'll need to resolve that ambiguity, although I suspect your textbook is simply using the terms incorrectly by positing 1 option as representing 1 share. (Señor @El OchoCinco thinks this is for your finals, and it may be - so I'll give you some hopefully helpful hints, but no direct answers.) Given that these are call options, would that put them in or out of the money? In other words, are the options exercisable by the owner at expiration - the person long those calls - or not? Here are more questions for you to think about: If you bought a call option with a 110 strike, how much would you have to pay for the 100 shares it represents if you exercised it? If the person on the other side of that trade bought those shares at $100, how much would they gain as a result of that call being exercised? Assuming you paid your counterparty $1 for that option, how much in total did you actually spend for those shares, and how much did they receive? Once you've answered these questions, the answer to your original problem should be clear. If it's not, post the answers here and you just might get more help.
The answers given are all wrong. A covered sale can only be calls in this case since a put sale would be uncovered unless the shares were shorted. Purchase of 10.000 stocks @ 30 -> called away @ 33 = 30.000 profit + 2000 call premium (as you already calculated) = 32.000 total profit. It doesn't matter were the stock trades at exercise when it's above the strike. If it trades at 100$, you lose 67$ less 20ctsper option and make 67$ per stock, so you'll always have a 20ct difference. I have no idea how that answer doesn't come up here...
So is this a multiple-choice question that you have to choose which one is the correct answer or do you have to provide an answer for each of the scenario? Many of the terms are really ambiguous. What is the "covered sale"? You mean a "covered call"? You sold a call or a put? And why do you think it's a put? From the question, it looks like it's a covered call. What is the "exercise value"? Is that the strike price on the option? Is this a question written in another language and you translated it into English? If so, it would help if you post the question in its original language here and somebody who's familiar with that language can translate it here.