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Covered Calls

a. The profit from buying and holding 500 shares of stock for 5 days was $2,725 based on the stock price increasing by $0.80 per share over that period, for a 7% holding period return. b. Implied volatility and option premiums will both tend to increase when the actual volatility of the underlying stock increases. c. A covered call position will benefit if the stock price stays the same or rises modestly above the strike price by expiration, but will lose value if the stock falls significantly below the strike price, as the downside protection from the short call diminishes.

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25 views1 page

Covered Calls

a. The profit from buying and holding 500 shares of stock for 5 days was $2,725 based on the stock price increasing by $0.80 per share over that period, for a 7% holding period return. b. Implied volatility and option premiums will both tend to increase when the actual volatility of the underlying stock increases. c. A covered call position will benefit if the stock price stays the same or rises modestly above the strike price by expiration, but will lose value if the stock falls significantly below the strike price, as the downside protection from the short call diminishes.

Uploaded by

SriSaraswathy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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a. Profit = (65 – 61.50 + 0.8)*500 + 5.

75*500/5 = 2725

Holding period return= (65 – 61.50 + 0.8)/61.50 * 100% =7%

b. They will both increase.

c. Yes, in light of the fact that the secured call will benefit from the stock's

climbing, staying level, or falling close to the credit from the sold call. The

position will lose as the stock value moves down past the measure of the

credit. Since suggested instability (the unpredictability desire taken from the

alternatives cost) is a huge part of the premium paid for a choice, if inferred

instability goes down, the secured call will benefit, and if inferred instability

goes up, it will lose. This is just the case before close, on the grounds that at

termination benefit and misfortune is altered.

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