Question

3. Suppose PDQ's stock is currently selling for $40 and the call with a $40 strike price on the stock is selling for $2.00. Calculate the value of a covered call if the stock price is $20, $30. $40, $50, $60 (10 Points).

Answer 1

Current stock price = $40

Strike price = $40

Price of call option = $2

Covered call = selling a call option on the owned underlying

The call option will be exercised when the stock price exceeds the strike price.

Value of a covered call if the stock price is:

a) $20: ($20 - $40 + $2) = - $18

b) $30: ($30 - $40 + $2) = - $8

c) $40: ($40 - $40 + $2) = $2

d) $50: (($50 - $40) + ($50 - $60) + $2) = $2

e) $60: (($60 - $40) + ($40 - $60) + $2) = $2