Question

Which one of the following is the situation when a fund manager wants to use a...

Which one of the following is the situation when a fund manager wants to use a covered call strategy?

a. He has a large long position in a stock and wants to protect against potential price drop.

b. He has a large short position in a stock and wants to protect against potential price increase.

c. He has a large long position in a stock and wants to make some extra cash betting future stock price will not increase above the strike of the call.

d. He has a large short position in a stock and wants to make some extra cash betting future stock price will not drop below the strike of the call.

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Answer #1

Whether investor is holding a long position in an stock by holding it in his portfolio and he wants to predict that the stock is not going to rise much and it is going to Linger around its strike price it will sell the call options which are above the strike price to make some extra bucks from the same asset it is holding.

So so this could be attributed to option( C) he has a large long position in a stock and wants to make some extra cash betting future stock price will not increase above the strike Price of the call.

Covered call is not a strategy to protect against potential price drop.It is ti make a few extra money out of the Asset which is being held in the portfolio.

Show the answer would be option( C ).

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