Question

A covered call consists of which of the following?

	A.	Buying a call and buying the underlying stock
	B.	Writing a call and buying the underlying stock
	C.	Buying a put and buying the underlying stock
	D.	Wriing a put and buying the underlying stock

Suppose we want to chart the profit or loss of a covered call. The stock is purchased at $75 a share. The call premium is $3.45 and has a strike price of $80.

At a stock price of $50 a share, what are our total gains or losses per share with this strategy?

	A.	Loss of $25
	B.	Loss of $21.55
	C.	Gain of $3.45
	D.	Gain of $9.45

Suppose we want to chart the profit or loss of a covered call. The stock is purchased at $75 a share. The call premium is $3.45 and has a strike price of $80.

At a stock price of $80 a share, what are our total gains or losses per share with this strategy?

	A.	Gain of $5.00
	B.	Gain of $8.45
	C.	Gain of $1.55
	D.	Loss of $1.55

Answer 1

Part A:

Covered Call COnsists Writing a call and Purchasing Under lying stock.

Part B:

As Strike Price > Stock Price on Maturity, Call option will not be executed by Holder.

Net Loss = [ Sale Price - Purchase Price + Premium Received ]

= [ $ 50 - $ 75 + $ 3.45 ]

= - $ 21.55

Option B is correct.

Part C:

As Strike Price = Stock Price on Maturity, Call option will not be executed by Holder( No difference even if it is executed).

Net Loss = [ Sale Price - Purchase Price + Premium Received ]

= [ $ 80 - $ 75 + $ 3.45 ]

= $8.45

Option B is correct.