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Post by Admin on May 21, 2014 13:38:12 GMT
You buy a $110 strike call option with 6 months to expiry, and pay $5 usd for it. Spot is currently at $100. In 6 months the option expires with spot at $105, and you lose more than $5 usd.
The question is, you bought an option, how come you lost more than the premium you paid for it?
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ppana
New Member
Posts: 2 
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Post by ppana on May 22, 2014 23:36:53 GMT
Is it because you paid the 5USD at the t=0 and you must consider funding cost on the 5USD at maturity when computing the PnL of the position?
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Post by Admin on May 23, 2014 7:41:48 GMT
Is it because you paid the 5USD at the t=0 and you must consider funding cost on the 5USD at maturity when computing the PnL of the position? Technically that is correct. But funding costs are priced into the actual option prices, but you are right, if you fund at high above the swap rate then you would have to consider that. There is also an answer that works in a clean world (by clean i generally mean 0 borrow, 0 IR). |
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Post by herbert on Oct 12, 2014 18:44:06 GMT
Because you've to pay broker's commissions?
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Post by wolverine on Apr 17, 2016 7:26:52 GMT
If we don't take into funding cost, then the maximum loss for buying an option is the premium. I would have imagined that $5 is the loss. I look forward for you to reveal the true answer
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