Question

describe the form of a “partially covered call” position as it relates to option pricing models. What role does this replicating portfolio play in the logic of arbitrage pricing for the call option? (HINT: This question is asking you to explain the logic of the BOPM as it relates to the equilibrium price of a call option.)

Answer 1

Partially covered call option means when the trader of the call option holds the security in his portfolio and he sells the call option of the same security which is currently out of the money.

Partially covered call option means when the amount of call option which are being sold is not fully hedged with the the underlying security in the portfolio and there would be a probability of making losses as the position is not fully covered.

These positions are taken by those traders who are bearish on short term on a stock and they also hold on the same stock in their long term portfolio.