4.20.2005

Q&A: What's the maximum profit for the covered call...

...if an investor purchases 100 shares of a stock for $38/share, sells call options on that stock with an exercise price of $50 for a premium of $3/share, and holds the option to expiration?

A: Value of covered call = value of underlying + value of short call = ($50-38+3) * 100 = $1500.

Bonus Points

  • Covered Call = Stock + a Short Call. In a covered call transactions, a trader is generally assumed to already own the underlying (the term "covered" means that the potential obligation to deliver the underlying is covered by the underlying.)
  • Invetors would likely write a covered call if they do not anticipate a significant change in stock price in the near term.

Category: C++ Quant > Derivatives > Options

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