Question

ASAP!

Let's create four P&L functions that describe the following trading strategies. Fill all the values and answer simple questions in the Excel template as attached. (Hint: Once you have filled in all the values correctly in the excel file, you can replicate all the plots as in LN 4 (pp. 19) automatically. 1. A covered call (a long stock + a short call) An investor purchases a MCD stock at $35.50 and she immediately shorts a 40 call MCD option. Its option premium is $1.15.

Answer 1

Payoff Chart Profit A covered call position is created by buying (or owning) stock and selling call options on a share-for-share basis. The covered call strategy is versatile. There are typically Meaning three different reasons why an investor might choose this & Goals To collect cash income when the forecast is for neutral-to- bullish price action in a stock. To sell a stock holding at a price that is above the current price declines No matter how high the stock price goes, profit is limited to strike price. Underlying Price Strike Price 35.5 1. A Covered Call Stratergy MCD purchased Strike price Premium ST (Stock Price at Expiration) Short Call Portfolio ( Covered Call) -14.35 -9.35 1.15 Long Stock -15.5 -10.5 -5.5 -0.5 4.5 9.5 14.5 1.15 1.15 -4.35 1.15 0.65 1.15 -3.85| -8.85 5.65 5.65
Formula Sheet
E MCD purchased Strike price Premium 35.5 40 1.15 ST (Stock Price at Expiration) =+D22+5 =+D23+5 =+D24+5 =+D25+5 =+D26+5 =+D27+5 Long Stock =+D22-$E$16 =+D23-$E$16 =+D24-$E$16 =+D25-$E$16 =+D26-$E$16 I=+D27-$E$16 =+D28-$E$16 Short Call =IF(D22>41.15,41.15-D22,1.15) =IF(D23>41.15,41.15-D23,1.15) =IF(D24>41.15,41.15-D24.1.15) =IF(D25>41.15,41.15-D25,1.15) =IF(D26>41.15,41.15-D26,1.15) |=IF(D27>41.15,41.15-D27,1.15) =IF(D28>41.15,41.15-D28,1.15) Portfolio ( Covered Call) =+E22+F22 -+E23+F23 |-+E24+F24 =+E25+F25 =+E26+F26 =+E27+F27 =+E28+F28