Seems some don't get why market makers want to sell a highflying stocks to earn more $$$:
Assuming a stock now is at $10 & one underwrites a call option for $30/share expired in 3 months.
1/3
Assuming a stock now is at $10 & one underwrites a call option for $30/share expired in 3 months.
1/3
If on the day of expiration, the stock goes $31:
- for a naked option, the underwriter earns the option selling amount but loses $21/share (each option unit is 100 shares)
- for a hedged one, the underwriter only earns the option selling amount
2/3
- for a naked option, the underwriter earns the option selling amount but loses $21/share (each option unit is 100 shares)
- for a hedged one, the underwriter only earns the option selling amount
2/3
But if on the day of expiration, the stock stops at $29:
- the naked underwriter will earn the option selling amount
- The hedged underwriter will earn the option selling amount + $19/share
- the naked underwriter will earn the option selling amount
- The hedged underwriter will earn the option selling amount + $19/share
There is a smart guy & my correction:
https://twitter.com/aHiddenJEM/status/1362638785427734528?s=20
Hedged calls = when the underwriter sells the options, also buy the stock shares at $10 in the same time.
Naked calls = when the underwriter sells the options, don't buy the stock shares in the same time.
Naked calls = when the underwriter sells the options, don't buy the stock shares in the same time.
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