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KembaraXtra – Islamic Derivatives: Call & Put Options Under Cash Settlement (Correct Idea + Case Analysis)
🔹 First — Fix Your Idea (Very Important)
Your idea is almost correct, but needs a small correction:
👉 In cash settlement:
✔ Correct Understanding
👉 No real buying/selling happens
🔹 Case Analysis (Call Option – Cash Settlement 🌴)
📌 Setup
📅 Scenario: Price Rises to RM4,500
👉 Difference = RM500
✔ Instead of:
👉 What actually happens:
👉 Net profit:
📅 Scenario: Price Falls to RM3,800
👉 Loss = RM50 (premium) ❌
🔹 Case Analysis (Put Option – Cash Settlement 🌴)
📌 Setup
📅 Scenario: Price Falls to RM3,500
👉 Difference = RM500
✔ Instead of:
👉 What actually happens:
👉 Net profit:
📅 Scenario: Price Rises to RM4,300
👉 Loss = RM50 (premium) ❌
🔹 Key Insight (Very Important for Exams)
👉 The idea of buy low / sell high still exists, BUT:
🔹 Simple Comparison
🔹 Final Simple Summary
👉 Call → profit when price above strike
👉 Put → profit when price below strike
🔹 First — Fix Your Idea (Very Important)
Your idea is almost correct, but needs a small correction:
👉 In cash settlement:
- You do NOT actually buy or sell goods
- You only receive or pay the price difference
✔ Correct Understanding
- Call option:
- Profit when market price > strike price 📈
- You receive the difference in cash
- Put option:
- Profit when market price < strike price 📉
- You receive the difference in cash
👉 No real buying/selling happens
🔹 Case Analysis (Call Option – Cash Settlement 🌴)
📌 Setup
- Strike price = RM4,000
- Premium = RM50
📅 Scenario: Price Rises to RM4,500
👉 Difference = RM500
✔ Instead of:
- Buying at RM4,000 and selling at RM4,500
👉 What actually happens:
- You directly receive RM500 cash
👉 Net profit:
- RM500 − RM50 = RM450 ✅
📅 Scenario: Price Falls to RM3,800
- No exercise
👉 Loss = RM50 (premium) ❌
🔹 Case Analysis (Put Option – Cash Settlement 🌴)
📌 Setup
- Strike price = RM4,000
- Premium = RM50
📅 Scenario: Price Falls to RM3,500
👉 Difference = RM500
✔ Instead of:
- Buying at RM3,500 and selling at RM4,000
👉 What actually happens:
- You receive RM500 cash
👉 Net profit:
- RM500 − RM50 = RM450 ✅
📅 Scenario: Price Rises to RM4,300
- No exercise
👉 Loss = RM50 (premium) ❌
🔹 Key Insight (Very Important for Exams)
👉 The idea of buy low / sell high still exists, BUT:
- It is only conceptual (theoretical)
- In reality (cash settlement):
- ❌ No actual buying/selling
- ✔ Only cash difference is paid
🔹 Simple Comparison
- Physical option:
- Buy and sell actual goods
- Cash-settled option:
- Just receive price difference in money
🔹 Final Simple Summary
- Your logic is correct in theory ✅
- But in cash settlement:
- ❌ No real trade happens
- ✔ Only profit/loss difference is paid
👉 Call → profit when price above strike
👉 Put → profit when price below strike
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