Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Below is part of the response you provided to a question I previously asked. I was wondering if you could explain more thoroughly the explanation you provided about the cash flows at time of expiration. I'm not totally understanding that portion of your response. Thanks.
Cash flows at t = 0 i.e. today = Cash flows from short selling 1 call option + cash flow from buying 1 stock = +C - S = C - S > 0 as C > S
Cash flows at the time of expiration = 0.
- If option gets excercised, you offer the stock you hold to the buyer of the call option, thus there is no cash flow involved.
- If option is not excercised by the buyer, then there is no cash flows anyway.
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