Question

Consider a call option with one year time remaining to expiration and the table below

(15 pts)

Time	Stock Price	Call Exercise Price	Call premium
Now	32	30	4
Later	29	30	1

      Provide the result of the covered call writing strategy in the table below in the context of marking to market only. Write as to what you are doing in each block and show numbers.

Time	Stock Position	Call Option Position	Net or combined position
Now	Action:	Action:	Result:
6 months later	Action:	Action:	Result:
Results in $
Results in %

Answer 1

Assumption: mentioned call option is a European option and can only be exercised at expiration (end of one year)

Time	Stock Position	Call Option Position	Net or combined position
Now	Action: Buy Stock for $32 Therefore, outflow of $32	Action: Enter into a short call position earning premium of $4 Therefore, cash inflow of $4	Result: -32 + 4 = -$28
6 months later	Action: Current market value of stock = $29	Action: since option is not expired yet, no action	Result: Mark to market value = +$29
Results in $			-28 + 29 = +1
Results in %			(1 / 28) * 100 = 3.57%