You set up a Covered Call position on a stock currently priced at $64, using the...

You set up a Covered Call position on a stock currently priced at $64, using the following call option: [C(S0=$64, T=3 months, X=70)] that has a current price of $1.90 in the market. Scale the transactions by one option contract. This problem has four different parts, a) to d) below, make sure and answer them all. (Show your calculations to get your final answer to earn partial credit, in case you miss the final answer.)

a) What are your transactions to set up this “Covered Call” position (starting from no positions)?

b) Assume you hold the position to option expiration. What is your breakeven terminal stock price then?

c) Assume you hold the position to option expiration. What is your maximum profit then, in dollars?

d) At what terminal stock price would you be indifferent between a “long stock only” position and this “Covered call” position? (meaning that you would make the same profit, in dollars, for both positions).

Expert Solution

jeff jeffy answered 2 years ago

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