Please show all work. Consider a call option with one year time remaining to exp

Question

Please show all work.

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

Time

Stock Price

Call Exercise Price

Call premium

Now

33

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.

Time

Stock Position

Call Option Position

Net or combined position

Now

Action:

Action:

Result:

6 months later

Action:

Action:

Result:

Results in $

Results in %

Time

Stock Price

Call Exercise Price

Call premium

Now

33

30

4

Later

29

30

1

Explanation / Answer

Covered call strategy involves selling call ooption on the asset already held. Here investor intends to hold asset for long term but believes that the asset might fall for short period. Thus premium received will be income for that period.

Time Stock Position Call Option Position Net or combined position Now Action:Buy stock @ 33 Action:Sell @ 4$ Result: -29$ 6 months later Action: Hold stock Action: Buy @ 1$ Result: Now cost of shares is reduce to 30$ Profit in $ 3$ Results in % 75%

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