Question

Using strike 225, and S1 $300, do a covered call. What do you conclude about maximum gain?

Answer 1

Covered call is a strategy which consists of a long stock and short call. If the stock price is $300, then the call option will be exercised , because a call option is in the money when strike price is less than stock price.

Maximum gain = strike price - stock price + call premium

Maximum gain is when the stike price is less or equal to stock price. If the option is not exercised, then the investor will not receive strike price and also have to pay for the stock bought by him. But, if the option is exercised , then the stock price is compensated by the strike Price. So, the profit increases.

Using the above example:-

As the option is exercised, he will get 225 strike price and has to pay 300 for buying stock .

Therefore total profit = 225+ (-300) = -75

If the option is not exercised, then total profit = -300