Consider the following covered call write: Buy 100 DEF at 42 and Sell 1 DEF Jan

Question

Consider the following covered call write: Buy 100 DEF at 42 and Sell 1 DEF Jan 45 call at 1.5.
•   At what price for DEF will the covered call writer and the buy-and-hold stockholder have the same gain at expiration in June (excluding transaction costs)?
•   Who would have a greater return if the stock were 43 at expiration?
•   What is the call writer's return on the initial stock investment if assigned?
•   At what price on the stock does the call writer get the same absolute return as if he had sold the June 40 call for 3.2 instead?

QRS stock is trading at $23 in January, and the following puts are available:
March 20 put at .60
March 22.5 put at 1.30
March 25 put at 3.20

• Which put write offers the greatest potential return on the investment required to purchase the stock?
• What is that return?

Explanation / Answer

The cost of the call is 1.50 and will not be exercised it price of DEF is below 45
So if the stock price ends at 43.50, the stock holder also earns 1.50 and call writer also earns 1.50 (as the call is not exercised and he gets the premium)

If the call is 43 at expiration, the stock holder earns 1 while the call writer gets the premium of 1.50, so the call writer has a greater return

(have answered the first two as there are multiple questions, please ask separately, thanks)

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