Traditional options strategies can also be used with futures options. Consider a covered call on a futures contract. We have a long position in a futures contract and we sell a call option against the futures contract. When the position is opened, the following parameters hold:
December call, strike price = 110
Call price = 1.24
Futures price for our long position: 108.72
Multiplier for contracts = 1000
If the call is exercised, the short position is assigned a short futures position.
At closing, the following price occurs:
Futures price = 114
A) If the closing futures price is 114, will the 110 December call be exercised? Explain.
B) If the call is exercised, we are assigned a short futures position (as writer) at the strike price of 110. Given your answer in (a), would there be a profit for us on the short call position under these circumstances? If so, calculate it (remember to multiply it by 1000).
C) What would be the revenue to us from the call premium? Remember the multiplier of 1000.
Given what happens with the futures position and covered call position, what is our net profit (or loss) on our combined position?