Writing an Option – Examples

### The examples refer to Table #1 – The situation of the option writers is opposite to that of the option buyers. – Any profit made by the option buyer comes from the option writer’s pocket and vice versa. – Any loss incurred by the option buyer flows into the option writer’s pocket. – As stated, the loss is limited to the amount of the premium. #### Rate to be displayed 10/07/00
– 4.1060 NIS ### Example 3: Writing a C 415 Aug “call” option, premium 280 NIS. – The premium includes only time value (the representative rate is lower than 4.15 NIS). #### Scenarios for date B: 1. **Scenario 1 – The dollar rate will be 4.30 NIS**
– The loss on the option: 1,500 NIS = (41,500 NIS – 43,000 NIS)
– Loss on the transaction: 1,220 NIS (= 280 NIS + -1,500 NIS) 2. **Scenario 2 – The dollar exchange rate fell to 4.10 NIS**
– The option will not be exercised and the writer will earn 280 NIS. ### Example 4: Writing a P 420 Aug”:put $” option, premium 911 NIS – The premium includes an intrinsic value: 940 NIS (= 41,060 NIS – 42,000 NIS)
– and time value: 29 – NIS (negative). **Note:** Negative time value is a rare case. This means that if we could exercise the option today, we would pay a premium of NIS 911 for it and receive NIS 940 upon exercise. (Sure profit) #### Scenarios for date B: 1. **Scenario 1 – The dollar exchange rate will be NIS 4.08**
– We will lose on the option: 1,200 NIS (= 40,800 NIS – 42,000 NIS)
– We will lose on the deal: 289 NIS (= 911 NIS + -1,200 NIS) 2. **Scenario 2 – The dollar exchange rate will be 4.19 NIS**
– We will lose on the option: 100 NIS (= 41,900 NIS – 42,000 NIS)
– We will profit on the deal: 811 NIS (= 911 NIS + -100 NIS) 3. **Scenario 3 – The dollar exchange rate will be 4.25 NIS**
– The option will not be exercised and we will earn NIS 911.