Question

You bought a stock at $109.73 and want to use a covered call strategy that consists in selling a call to lower the cost on the stock position. Calls with a strike K=114 are quoted with a bid of $1.07 and an ask of $1.14. What is the maximum gain on the entire strategy?

{Enter your answer in dollars with 2 decimals, but do not use the "$".}

Answer 1

You bought a stock at $109.73 and want to use a covered call strategy that consists in selling a call to lower the cost on the stock position. Calls with a strike K=114 are quoted with a bid of $1.07 and an ask of $1.14. What is the maximum gain on the entire strategy?

The purchase price of the stock = $109.73

Strike price = $114

We sell call at the bid price = $1.07

This is the premium we have collected.

The maximum gain on the covered call happens when the stock expires at the strike price.

So, when St = 114

The gain from the long stock = 114 - 109.73 = $4.27

When the stock expires at 114, the call option expires worthless and we as the sellers of this option get to keep the entire premium. So, the profit from the short call option = $1.07

The maximum gain = 4.27 + 1.07

The maximum gain = $5.34 per share or 5.34 * 100 = $534 per contract