Financial Instruments by David M. Weiss

Author:David M. Weiss
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2010-02-28T16:00:00+00:00

If the premium was zero at the end of the option’s life, Mike might just let the call option expire and save the second $50 commission. That decision would depend on any one of several independent events. Also, if Mike exercised the option instead of closing it out, the commission charged would be based on the commission structure charged by Mike’s firm on the underlying 100 shares.

On the other hand, if Maxine Emumms (Max) sold two put options for 2points, she would net 5points (2 × $275 = $550 - $50 = $500). If the option premiums fell to zero and the option expired worthless, Max would net $500. If, during the life of the option, Max decided to reacquire the option, she would have to pay the other $50 commission, plus the cost of the closeout option. Finally, if an exercise by an owner should be assigned to her, she should have to receive the underlying vs. payment, besides the cost of acquiring the underlying, she would have to contend with the commission cost associated with the underlying product.

The chart below depicts Max’s profit or loss outcome per option. She sold the puts for a net of 2½ points per option. If the option was trading at 4 points, she would have an unrealized loss of 1½ points. If they were worthless, she would have an unrealized profit of 2½ points.

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