Each option allows us to make a “transaction” on the option’s expiration date.
In Call options, the transaction is to buy the MAOF index at the exercise price (determined in advance) and sell it at the market price, which is the price of the underlying asset (examples below).
In Put options, the transaction is to buy the MAOF index at the market price and sell it (on the option’s exercise date) at the exercise price.
We will only make the above transactions if we can buy cheap and sell high.
The feasibility of executing the transaction is affected by only two pieces of information:
- The price of the underlying asset.
- The exercise price.
Examples: In the profit calculations in the examples below, we ignored the purchase price of the option. To obtain the net profit , we must subtract the price we paid for buying the option from the profit obtained in the calculations below.
1. Call option:
We have the C360May option and the index reached 380 points at the end of May. In this situation, it is worth exercising the option. Our profit will be NIS 2,000 as obtained from the following calculation:
| Underlying asset price (sale price) | 38,000 NIS | Flight index * 100 NIS |
| (-) | ||
| Exercise price (purchase price) | 36,000 NIS | (Minus) Realization index * 100 NIS |
| spacious | 2,000 NIS |
2. Put option:
We have the P370May option and the index reached 360 points at the end of May. In this case too, we should exercise the option. Our profit will be NIS 1,000 as obtained from the following calculation:
| Exercise price (sale price) | 37,000 NIS | Realization index * 100 NIS |
| (-) | ||
| Underlying asset price (purchase price) | 36,000 NIS | (Minus) MAOF Index * 100 NIS |
| spacious | 1,000 NIS |
