Question

Meghan has made lot of money for her hedge fund clients by being long AAPL at the right price. She is getting the notion that AAPL has gotten a little too expensive but doesn’t want to sell the stock because she loves the stock for the long run, trading isn’t free and, at his cost basis, the tax consequences could be dire. In order to protect herself, Meghan could

a. write (sell) covered calls.

b. write (sell) naked calls.

c. buy puts.

d. buy calls.

e. more than one, but not all, of the above.

Answer 1

If she thinks that the share has gotten little too expensive, and if she does not want to trade but she wants to make a money on her view, she should write the covered call of share.

Writing a covered call option is preferably done by the investors who hold the shares in their portfolio and are bullish in the long run but they also want to gain from the short term momentum which could be on the way down side.buying a put option is also a good idea but since she don't want to do any kind of trading, selling of covered calls would help her eat the premium and since she is holding the stock in the portfolio, she would be hedged.

She should not be buying any call option because she is not bullish in short run and also not write the naked calls because that would open up unlimited risk.

So the correct answer would be option(A) write covered calls.