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Bogi


Total Posts: 5
Joined: May 2021
 
Posted: 2021-05-03 20:53
Hello,
I'm a programmer by trade and education who recently gotten interested in learning about options. After some research, I arrived at the conclusion that learning from Euan Sinclair's books, starting with the first 'Option Trading' might be the best course of action.
However, I'm facing difficulty understanding the material starting with page 26! I'm opening this thread to record any Q&A's about this specific book

svisstack


Total Posts: 367
Joined: Feb 2014
 
Posted: 2021-05-03 20:58
search filthy on this forum and maybe contact him (book author)

First Commander of the USS Enterprise

Bogi


Total Posts: 5
Joined: May 2021
 
Posted: 2021-05-03 21:27
Thanks for the pointer. I shall try to reach out to him. However, my question is very basic to the dwellers of this forum who might have read that book. So here it goes:

On page 26, profit from the sale of a call is expressed as follows:

c − (S0 − ST) where:

c denotes a call
S0 is the price of the underlying
ST is the price of the underlying at T=expiration

How does this make sense? shouldn't profit be expressed instead:

c - (sale price - (difference between sale price S0 and price at expiration))
or written more cleanly:
c - (S0 - (S0-ST))

Thanks

tringran


Total Posts: 1
Joined: Jun 2020
 
Posted: 2021-05-04 01:44
On the page 26 it says that c - (S0 - ST) is the profit from selling the call AND buying the underlying at a price of S0.

Bogi


Total Posts: 5
Joined: May 2021
 
Posted: 2021-05-04 05:28
Ok,
What about that (-ST) term? You already paid for the underlying with the - S0, why - ST as well?

Maggette


Total Posts: 1307
Joined: Jun 2007
 
Posted: 2021-05-04 08:03
It's + ST. -(-ST) = +ST. You sell the call at c and keep the money. And you buy the stock at S0. At maturity you realize the P&L form keeping the stock (could be a loss if ST < S0). No?

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

Bogi


Total Posts: 5
Joined: May 2021
 
Posted: 2021-05-04 10:24
Yes, indeed, I understand that P&L is realized at maturity from the amount difference between what we gotten when we sold the call c, and the value of the stock by maturity. My problem is the math formulation.

Example. At T = 0, I sold a call c for 1000 and bought stocks for 900. Let's say stock value dropped from 900 to 850 by T = expiration. Hence, my P&L would be:
1000 - (900 - (900-850)) = 150.

The formula in the book would have you do:
1000 - (900 - 850) = 950!!

I must be missing something here

Maggette


Total Posts: 1307
Joined: Jun 2007
 
Posted: 2021-05-04 10:42
Hi, I don't have the book in front of me and hence I am not entirely clear what we are calculating. Maybe I am missing the point.

But think in cash flow:
You sold c = + 1000
You bought S0 = -900
You sell ST = +850
=> c - S0 + ST
=> 1000 - 900 + 850 = 950

Makes perfect sense to me :).

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...

Bogi


Total Posts: 5
Joined: May 2021
 
Posted: 2021-05-04 10:53
Indeed, you're right. I've been totally off track on this. Thanks for you help again

Maggette


Total Posts: 1307
Joined: Jun 2007
 
Posted: 2021-05-04 11:06
You are welcome. That what this board was about before the spam took over:)

Ich kam hierher und sah dich und deine Leute lächeln, und sagte mir: Maggette, scheiss auf den small talk, lass lieber deine Fäuste sprechen...
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