You just sold ten Jan 2015 call option contracts selling at $1.25 on Intel Corp.
ID: 2798043 • Letter: Y
Question
You just sold ten Jan 2015 call option contracts selling at $1.25 on Intel Corp. stock (INTC). The options have a strike price of $35.00 and the stock is selling at $34.75 per share. You are implementing a covered call strategy and must simultaneously buy INTC common stock.
How much of the $1.25 option price is exercise value and how much is time value premium?
Exercise Value ______
Time Value Premium ______
How many shares of INTC do you need to purchase to complete your covered call transaction, and how much net cash did you pay for your investment (ignore margin issues).
# of INTC shares of stock that would be purchased _______
Total net $ invested in INTC stock and ten option contracts _______
Assume that the option has just expired in January and INTC stock closed at $34. What action will the option buyer take: purchase shares from you or walk away? How much have you earned on your investment (total $)?
Option buyer action (circle one): Purchase your shares Walk Away
Total $ earned _______
Assume that the option has just expired in January and INTC stock closed at $38. What action will the option buyer take: purchase shares from you or walk away? How much have you earned on your investment (total $)?
Option buyer action (circle one): Purchase your shares Walk Away
Total $ earned _______
Explanation / Answer
a) Exercise Value: $ 0
Since the price of stock $ 34.75 is less than the strike price of call option. It is an out of money option so Exercise value is $ 0.
Time Value Premium: $ 1.25
Time value premium = Option price - Exercise value, since it's an out of money option the Option price only is the time value premium as exercise value= $ 0
b) # of INTC shares of stock that would be purchased: 10
In covered call strategy the no of call options sold is equal to the no. of stock purchased. Since 10 call are sold, 10 stock should be purchased.
Total net $ invested in INTC stock and ten option contracts = No. of stock purchased*current Price – No. of call sold* price at which call sold
= (10*34.75) - (10*1.25)
= $ 335
c) If INTC stock closed at $34: Since a call is right to buy at particular price and the stock closed at $ 34, option strike price is $ 35. The option buyer will walk away.
Total earned= Option premium received - Loss on stock
= (1.25*10) - (34.75-34)*10
= $ 5
d) If INTC stock closed at $38 : Since a call is right to buy at particular price and the stock closed at $ 34, option strike price is $ 38 .The option buyer will Purchase the share at the strike price i.e. $ 35.
Total earned = Profit on stock + option premium received
= (35-34.75)*10 + (1.25*10)
= $ 15
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