Question

1. A six-month call is the right to buy stock at $20. Currently, the stock is selling for $22, and the call is selling for $5. You buy 100 shares ($2,200) and sell one call (in other words, you receive $500). a. Does this position illustrate covered or naked call writing? b. If, at the expiration date of the call, the price of the stock is S29, what is your profit on the combined position? c. If, at the expiration date of the call, the price of the stock is $19, what is your profit on the combined position?

Answer 1

Call Option is the right to buy a specified security at a specified price on a future date. The right is vested in the hands of call buyer.

a.The position illustrates covered call writing.

Covered call writing is when the Investor who writes calls owns the underlying security.

Naked Call writing is when the call writer writes calls without owning the security

b.The Market price is higher than the exercise price, hence the call buyer will exercise the option

Profit = (20-22)*100 +500 = $300

c.Since is the market price is lower than the strike price, call buyer will not exercise

Profit is equal to the premium received on options and shares will be sold in the market

= (19-22)*100 + 500 = $200