CMA Final · Strategic Financial Management · Options
A trader holds 1,000 shares of Ganga Cement bought at Rs 250 and writes 1,000 call options (covered call) with strike Rs 270, receiving a premium of Rs 12 per share. If the price at expiry is Rs 300, what is the total net profit of the combined position?
The net profit is Rs 32,000. Each share gains Rs 50 (300 less 250), the written call loses Rs 30 at exercise but brings Rs 12 premium, a net loss of Rs 18, so profit is Rs 32 per share on 1,000 shares.
- ARs 20,000
- BRs 32,000Correct
- CRs 50,000
- DRs 62,000
Explanation
Share gain = 300 - 250 = 50 per share. Call loss = 300 - 270 = 30; net of premium received the call result = 12 - 30 = -18. Total = 50 - 18 = 32 per share, i.e. Rs 32,000. Rs 20,000 is gain capped at strike without premium (270-250); Rs 62,000 ignores the call loss.
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