QUESTION 40 2 points Save Answer Covered Call Strategy: Great American Inc. has

Question

QUESTION 40 2 points Save Answer Covered Call Strategy: Great American Inc. has purchased shares of Stock USA at $49 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position in this stock. The exercise price is $54, the expiration date is six months, and the premium on the call option is $2. What is the breakeven point per share with and without the covered call option? With Covered Call: $47, Without Covered Call: $51 With Covered Call: $47, Without Covered Call $49 With Covered Call: $49, Without Covered Call: $47 With Covered Call: $51, Without Covered Call: $49 None of the above 100%

Explanation / Answer

in covered call strategy investor is long a stock and then writes call options to generate income from premium.

with covered call strategy frim will get income of 2$ . it bought the stock for 49$ if the stock losses value and goes to 47$ it will still get 49$ because income plus current value =49$

without using covered call the firm is generating no income it will only get the amount it sells the share at. hence breakeven is at 49$ because the stock was bought at that value.

hence option b is correct.

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