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Rob's s1452 Notes

✏️ Practice with Calls

Long Call Practice Problems

✏️ Long Call #1

✏️ You have Bought a K=$49 Call. It is about to expire. Suppose S=$46 and Premium=$1.

  1. Will you exercise this option?
  2. What is your Per-Share Profit or Loss (P/L)?
    ✔ Click here to view answer

    Short Answer:

    1. Out of The Money, so WON'T be exercised.
    2. P/L = -$1.

    Full Explanation:

    This Long Call allows you to buy shares of stock worth S=$46 for K=$49.

    You could easily purchase the stock on the open market for $46, so exercising the option would mean overpaying by $3. We would think of this as a per-share $3 loss.

    Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

    The only impact on your P/L is the $1 premium you paid. In hindsight, this money was wasted. P/L = -$1 (per share). Better luck next time!

    ✏️ Long Call #2

    ✏️ You have Bought a K=$59 Call. It is about to expire. Suppose S=$66 and Premium=$2.

    1. Will you exercise this option?
    2. What is your Per-Share Profit or Loss (P/L)?
      ✔ Click here to view answer

      Short Answer:

      1. In The Money, so WILL be exercised.
      2. P/L = $5.

      Full Explanation:

      This Long Call allows you to buy shares of stock worth S=$66 for K=$59. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$59.

      That is a discount of $7, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $7. This $7 is the option's intrinsic value.

      (If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$59 and then turn around and sell them on the market for S=$66, netting a $7 profit. You could even take out a short-term loan to do this.)

      In addition to the $7 gain, you also paid a premium of $2. Therefore, your final P/L combines the $7 gain and the $2 loss: P/L = $7 - $2 = $5 (per share).

      ✏️ Long Call #3

      ✏️ You have Bought a K=$62 Call. It is about to expire. Suppose S=$65 and Premium=$3.

      1. Will you exercise this option?
      2. What is your Per-Share Profit or Loss (P/L)?
        ✔ Click here to view answer

        Short Answer:

        1. In The Money, so WILL be exercised.
        2. P/L = $0.

        Full Explanation:

        This Long Call allows you to buy shares of stock worth S=$65 for K=$62. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$62.

        That is a discount of $3, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $3. This $3 is the option's intrinsic value.

        (If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$62 and then turn around and sell them on the market for S=$65, netting a $3 profit. You could even take out a short-term loan to do this.)

        In addition to the $3 gain, you also paid a premium of $3. Therefore, your final P/L combines the $3 gain and the $3 loss: P/L = $3 - $3 = $0 (per share).

        ✏️ Long Call #4

        ✏️ You have Bought a K=$33 Call. It is about to expire. Suppose S=$31 and Premium=$4.

        1. Will you exercise this option?
        2. What is your Per-Share Profit or Loss (P/L)?
          ✔ Click here to view answer

          Short Answer:

          1. Out of The Money, so WON'T be exercised.
          2. P/L = -$4.

          Full Explanation:

          This Long Call allows you to buy shares of stock worth S=$31 for K=$33.

          You could easily purchase the stock on the open market for $31, so exercising the option would mean overpaying by $2. We would think of this as a per-share $2 loss.

          Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

          The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!

          ✏️ Long Call #5

          ✏️ You have Bought a K=$87 Call. It is about to expire. Suppose S=$89 and Premium=$1.

          1. Will you exercise this option?
          2. What is your Per-Share Profit or Loss (P/L)?
            ✔ Click here to view answer

            Short Answer:

            1. In The Money, so WILL be exercised.
            2. P/L = $1.

            Full Explanation:

            This Long Call allows you to buy shares of stock worth S=$89 for K=$87. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$87.

            That is a discount of $2, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $2. This $2 is the option's intrinsic value.

            (If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$87 and then turn around and sell them on the market for S=$89, netting a $2 profit. You could even take out a short-term loan to do this.)

            In addition to the $2 gain, you also paid a premium of $1. Therefore, your final P/L combines the $2 gain and the $1 loss: P/L = $2 - $1 = $1 (per share).

            Short Call Practice Problems

            ✏️ Short Call #1

            ✏️ You have Sold/Written a K=$46 Call. It is about to expire. Suppose S=$40 and Premium=$3.

            1. Will this option be exercised?
            2. What is your Per-Share Profit or Loss (P/L)?
              ✔ Click here to view answer

              Short Answer:

              1. Out of The Money, so WON'T be exercised.
              2. P/L = $3.

              Full Explanation:

              You have sold an option that obligates you to sell shares of stock worth S=$40 for K=$46 if requested.

              You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$46.

              From your counterparty's perspective, there is no way to make money by paying $46 for shares only worth $40. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

              Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $3 premium your counterparty paid you. P/L = $3 (per share).

              ✏️ Short Call #2

              ✏️ You have Sold/Written a K=$34 Call. It is about to expire. Suppose S=$36 and Premium=$1.

              1. Will this option be exercised?
              2. What is your Per-Share Profit or Loss (P/L)?
                ✔ Click here to view answer

                Short Answer:

                1. In The Money, so WILL be exercised.
                2. P/L = -$1.

                Full Explanation:

                You have sold an option that obligates you to sell shares of stock worth S=$36 for only K=$34 if requested.

                You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$34.

                By purchasing your shares worth $36 for only $34 (a discount of $2), your counterparty can make $2 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $2 for its owner.

                We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$34. This will cause a loss for you of $2. For example, if you own the shares, you will have to sell them for $2 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $36 and sell them for $2 less. Either way, you are $2 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $2 richer. The IV of the option is both your loss and their gain.)

                Offsetting the $2 loss from selling the shares, you also received a premium of $1. Your final per-share premium is P/L = $1 - $2 = -$1.

                (For comparison, your counterparty's final P/L is $1. As always, one party's gain is the other party's loss.)

                ✏️ Short Call #3

                ✏️ You have Sold/Written a K=$71 Call. It is about to expire. Suppose S=$69 and Premium=$1.

                1. Will this option be exercised?
                2. What is your Per-Share Profit or Loss (P/L)?
                  ✔ Click here to view answer

                  Short Answer:

                  1. Out of The Money, so WON'T be exercised.
                  2. P/L = $1.

                  Full Explanation:

                  You have sold an option that obligates you to sell shares of stock worth S=$69 for K=$71 if requested.

                  You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$71.

                  From your counterparty's perspective, there is no way to make money by paying $71 for shares only worth $69. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                  Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $1 premium your counterparty paid you. P/L = $1 (per share).

                  ✏️ Short Call #4

                  ✏️ You have Sold/Written a K=$45 Call. It is about to expire. Suppose S=$47 and Premium=$1.

                  1. Will this option be exercised?
                  2. What is your Per-Share Profit or Loss (P/L)?
                    ✔ Click here to view answer

                    Short Answer:

                    1. In The Money, so WILL be exercised.
                    2. P/L = -$1.

                    Full Explanation:

                    You have sold an option that obligates you to sell shares of stock worth S=$47 for only K=$45 if requested.

                    You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$45.

                    By purchasing your shares worth $47 for only $45 (a discount of $2), your counterparty can make $2 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $2 for its owner.

                    We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$45. This will cause a loss for you of $2. For example, if you own the shares, you will have to sell them for $2 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $47 and sell them for $2 less. Either way, you are $2 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $2 richer. The IV of the option is both your loss and their gain.)

                    Offsetting the $2 loss from selling the shares, you also received a premium of $1. Your final per-share premium is P/L = $1 - $2 = -$1.

                    (For comparison, your counterparty's final P/L is $1. As always, one party's gain is the other party's loss.)

                    ✏️ Short Call #5

                    ✏️ You have Sold/Written a K=$82 Call. It is about to expire. Suppose S=$75 and Premium=$3.

                    1. Will this option be exercised?
                    2. What is your Per-Share Profit or Loss (P/L)?
                      ✔ Click here to view answer

                      Short Answer:

                      1. Out of The Money, so WON'T be exercised.
                      2. P/L = $3.

                      Full Explanation:

                      You have sold an option that obligates you to sell shares of stock worth S=$75 for K=$82 if requested.

                      You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$82.

                      From your counterparty's perspective, there is no way to make money by paying $82 for shares only worth $75. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                      Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $3 premium your counterparty paid you. P/L = $3 (per share).

                      ✏️ Short Call #6

                      ✏️ You have Sold/Written a K=$43 Call. It is about to expire. Suppose S=$50 and Premium=$2.

                      1. Will this option be exercised?
                      2. What is your Per-Share Profit or Loss (P/L)?
                        ✔ Click here to view answer

                        Short Answer:

                        1. In The Money, so WILL be exercised.
                        2. P/L = -$5.

                        Full Explanation:

                        You have sold an option that obligates you to sell shares of stock worth S=$50 for only K=$43 if requested.

                        You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$43.

                        By purchasing your shares worth $50 for only $43 (a discount of $7), your counterparty can make $7 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $7 for its owner.

                        We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$43. This will cause a loss for you of $7. For example, if you own the shares, you will have to sell them for $7 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $50 and sell them for $7 less. Either way, you are $7 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $7 richer. The IV of the option is both your loss and their gain.)

                        Offsetting the $7 loss from selling the shares, you also received a premium of $2. Your final per-share premium is P/L = $2 - $7 = -$5.

                        (For comparison, your counterparty's final P/L is $5. As always, one party's gain is the other party's loss.)

                        ✏️ Short Call #7

                        ✏️ You have Sold/Written a K=$65 Call. It is about to expire. Suppose S=$66 and Premium=$1.

                        1. Will this option be exercised?
                        2. What is your Per-Share Profit or Loss (P/L)?
                          ✔ Click here to view answer

                          Short Answer:

                          1. In The Money, so WILL be exercised.
                          2. P/L = -$0.

                          Full Explanation:

                          You have sold an option that obligates you to sell shares of stock worth S=$66 for only K=$65 if requested.

                          You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$65.

                          By purchasing your shares worth $66 for only $65 (a discount of $1), your counterparty can make $1 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $1 for its owner.

                          We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$65. This will cause a loss for you of $1. For example, if you own the shares, you will have to sell them for $1 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $66 and sell them for $1 less. Either way, you are $1 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $1 richer. The IV of the option is both your loss and their gain.)

                          Offsetting the $1 loss from selling the shares, you also received a premium of $1. Your final per-share premium is P/L = $1 - $1 = -$0.

                          (For comparison, your counterparty's final P/L is $0. As always, one party's gain is the other party's loss.)

                          Mixed Long Calls and Short Calls

                          ✏️ Mixed Call #1

                          ✏️ You have Bought a K=$74 Call. It is about to expire. Suppose S=$81 and Premium=$4.

                          1. Will you exercise this option?
                          2. What is your Per-Share Profit or Loss (P/L)?
                            ✔ Click here to view answer

                            Short Answer:

                            1. In The Money, so WILL be exercised.
                            2. P/L = $3.

                            Full Explanation:

                            This Long Call allows you to buy shares of stock worth S=$81 for K=$74. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$74.

                            That is a discount of $7, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $7. This $7 is the option's intrinsic value.

                            (If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$74 and then turn around and sell them on the market for S=$81, netting a $7 profit. You could even take out a short-term loan to do this.)

                            In addition to the $7 gain, you also paid a premium of $4. Therefore, your final P/L combines the $7 gain and the $4 loss: P/L = $7 - $4 = $3 (per share).

                            ✏️ Mixed Call #2

                            ✏️ You have Bought a K=$40 Call. It is about to expire. Suppose S=$44 and Premium=$1.

                            1. Will you exercise this option?
                            2. What is your Per-Share Profit or Loss (P/L)?
                              ✔ Click here to view answer

                              Short Answer:

                              1. In The Money, so WILL be exercised.
                              2. P/L = $3.

                              Full Explanation:

                              This Long Call allows you to buy shares of stock worth S=$44 for K=$40. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$40.

                              That is a discount of $4, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $4. This $4 is the option's intrinsic value.

                              (If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$40 and then turn around and sell them on the market for S=$44, netting a $4 profit. You could even take out a short-term loan to do this.)

                              In addition to the $4 gain, you also paid a premium of $1. Therefore, your final P/L combines the $4 gain and the $1 loss: P/L = $4 - $1 = $3 (per share).

                              ✏️ Mixed Call #3

                              ✏️ You have Sold/Written a K=$50 Call. It is about to expire. Suppose S=$48 and Premium=$4.

                              1. Will this option be exercised?
                              2. What is your Per-Share Profit or Loss (P/L)?
                                ✔ Click here to view answer

                                Short Answer:

                                1. Out of The Money, so WON'T be exercised.
                                2. P/L = $4.

                                Full Explanation:

                                You have sold an option that obligates you to sell shares of stock worth S=$48 for K=$50 if requested.

                                You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$50.

                                From your counterparty's perspective, there is no way to make money by paying $50 for shares only worth $48. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $4 premium your counterparty paid you. P/L = $4 (per share).

                                ✏️ Mixed Call #4

                                ✏️ You have Sold/Written a K=$61 Call. It is about to expire. Suppose S=$67 and Premium=$1.

                                1. Will this option be exercised?
                                2. What is your Per-Share Profit or Loss (P/L)?
                                  ✔ Click here to view answer

                                  Short Answer:

                                  1. In The Money, so WILL be exercised.
                                  2. P/L = -$5.

                                  Full Explanation:

                                  You have sold an option that obligates you to sell shares of stock worth S=$67 for only K=$61 if requested.

                                  You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$61.

                                  By purchasing your shares worth $67 for only $61 (a discount of $6), your counterparty can make $6 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $6 for its owner.

                                  We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$61. This will cause a loss for you of $6. For example, if you own the shares, you will have to sell them for $6 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $67 and sell them for $6 less. Either way, you are $6 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $6 richer. The IV of the option is both your loss and their gain.)

                                  Offsetting the $6 loss from selling the shares, you also received a premium of $1. Your final per-share premium is P/L = $1 - $6 = -$5.

                                  (For comparison, your counterparty's final P/L is $5. As always, one party's gain is the other party's loss.)

                                  ✏️ Mixed Call #5

                                  ✏️ You have Bought a K=$87 Call. It is about to expire. Suppose S=$82 and Premium=$2.

                                  1. Will you exercise this option?
                                  2. What is your Per-Share Profit or Loss (P/L)?
                                    ✔ Click here to view answer

                                    Short Answer:

                                    1. Out of The Money, so WON'T be exercised.
                                    2. P/L = -$2.

                                    Full Explanation:

                                    This Long Call allows you to buy shares of stock worth S=$82 for K=$87.

                                    You could easily purchase the stock on the open market for $82, so exercising the option would mean overpaying by $5. We would think of this as a per-share $5 loss.

                                    Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                    The only impact on your P/L is the $2 premium you paid. In hindsight, this money was wasted. P/L = -$2 (per share). Better luck next time!

                                    ✏️ Mixed Call #6

                                    ✏️ You have Sold/Written a K=$87 Call. It is about to expire. Suppose S=$79 and Premium=$2.

                                    1. Will this option be exercised?
                                    2. What is your Per-Share Profit or Loss (P/L)?
                                      ✔ Click here to view answer

                                      Short Answer:

                                      1. Out of The Money, so WON'T be exercised.
                                      2. P/L = $2.

                                      Full Explanation:

                                      You have sold an option that obligates you to sell shares of stock worth S=$79 for K=$87 if requested.

                                      You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$87.

                                      From your counterparty's perspective, there is no way to make money by paying $87 for shares only worth $79. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                      Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $2 premium your counterparty paid you. P/L = $2 (per share).

                                      ✏️ Mixed Call #7

                                      ✏️ You have Sold/Written a K=$84 Call. It is about to expire. Suppose S=$76 and Premium=$1.

                                      1. Will this option be exercised?
                                      2. What is your Per-Share Profit or Loss (P/L)?
                                        ✔ Click here to view answer

                                        Short Answer:

                                        1. Out of The Money, so WON'T be exercised.
                                        2. P/L = $1.

                                        Full Explanation:

                                        You have sold an option that obligates you to sell shares of stock worth S=$76 for K=$84 if requested.

                                        You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$84.

                                        From your counterparty's perspective, there is no way to make money by paying $84 for shares only worth $76. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                        Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $1 premium your counterparty paid you. P/L = $1 (per share).

                                        ✏️ Mixed Call #8

                                        ✏️ You have Sold/Written a K=$58 Call. It is about to expire. Suppose S=$56 and Premium=$2.

                                        1. Will this option be exercised?
                                        2. What is your Per-Share Profit or Loss (P/L)?
                                          ✔ Click here to view answer

                                          Short Answer:

                                          1. Out of The Money, so WON'T be exercised.
                                          2. P/L = $2.

                                          Full Explanation:

                                          You have sold an option that obligates you to sell shares of stock worth S=$56 for K=$58 if requested.

                                          You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$58.

                                          From your counterparty's perspective, there is no way to make money by paying $58 for shares only worth $56. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                          Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $2 premium your counterparty paid you. P/L = $2 (per share).

                                          ✏️ Mixed Call #9

                                          ✏️ You have Bought a K=$69 Call. It is about to expire. Suppose S=$66 and Premium=$1.

                                          1. Will you exercise this option?
                                          2. What is your Per-Share Profit or Loss (P/L)?
                                            ✔ Click here to view answer

                                            Short Answer:

                                            1. Out of The Money, so WON'T be exercised.
                                            2. P/L = -$1.

                                            Full Explanation:

                                            This Long Call allows you to buy shares of stock worth S=$66 for K=$69.

                                            You could easily purchase the stock on the open market for $66, so exercising the option would mean overpaying by $3. We would think of this as a per-share $3 loss.

                                            Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                            The only impact on your P/L is the $1 premium you paid. In hindsight, this money was wasted. P/L = -$1 (per share). Better luck next time!

                                            ✏️ Mixed Call #10

                                            ✏️ You have Sold/Written a K=$70 Call. It is about to expire. Suppose S=$69 and Premium=$3.

                                            1. Will this option be exercised?
                                            2. What is your Per-Share Profit or Loss (P/L)?
                                              ✔ Click here to view answer

                                              Short Answer:

                                              1. Out of The Money, so WON'T be exercised.
                                              2. P/L = $3.

                                              Full Explanation:

                                              You have sold an option that obligates you to sell shares of stock worth S=$69 for K=$70 if requested.

                                              You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$70.

                                              From your counterparty's perspective, there is no way to make money by paying $70 for shares only worth $69. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

                                              Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $3 premium your counterparty paid you. P/L = $3 (per share).

                                              ✏️ Mixed Call #11

                                              ✏️ You have Bought a K=$46 Call. It is about to expire. Suppose S=$52 and Premium=$2.

                                              1. Will you exercise this option?
                                              2. What is your Per-Share Profit or Loss (P/L)?
                                                ✔ Click here to view answer

                                                Short Answer:

                                                1. In The Money, so WILL be exercised.
                                                2. P/L = $4.

                                                Full Explanation:

                                                This Long Call allows you to buy shares of stock worth S=$52 for K=$46. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$46.

                                                That is a discount of $6, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $6. This $6 is the option's intrinsic value.

                                                (If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$46 and then turn around and sell them on the market for S=$52, netting a $6 profit. You could even take out a short-term loan to do this.)

                                                In addition to the $6 gain, you also paid a premium of $2. Therefore, your final P/L combines the $6 gain and the $2 loss: P/L = $6 - $2 = $4 (per share).