Question

Walmard Inc. has purchased shares of Stock A at $12 per share. It will sell the stock in a year. It considers using a strategy of covered call. The following information is the current market premium and exercise price for call and put options of Stock A.

​

Types of options	Exercise price ($)	Premium ($)
Call	115	3
Put	110	4

​

What is the Stock A break-even price if Walmard Inc. implements the covered call strategy? Walmard Inc. will make zero gain/loss with the break-even price.

Answer 1

Purchase price of the stock = $112 (It is a typo in the question)

$115 strike call option premium = $3

In a coverd call strategy, Walmard Inc. owns the underlying shares of the stock and sells call option on the same underlying stock.

We pay $112 per share to own the stock and collect $3 per share to sell the right to someone to purchase our stocks at $115 per share.

At breakeven out profit/loss = 0

Breakeven price = Purchase price of the stock - Premium received from selling call option

Breakeven price = 112 - 3

Breakeven price = $109