CFA CFA Level 1 Question of the Week – Derivatives

Question of the Week – Derivatives

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    • AdaptPrep
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      A stock is available for $48, and a 3-month call on the stock at $50 is worth $3. The maximum loss on a covered call is closest to:

      • $45
      • $48
      • $50
    • AdaptPrep
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      The covered call involves
      purchasing a stock and selling a call option. That strategy costs you $45 ($48 –
      $3).

      The short call will offset all
      gains above the strike price, $50. Above $50, the profit of the strategy is $5
      ($50 – $45).

      Below $50, the profit of the
      strategy decreases as stock price decreases. The worst-case scenario is if the
      company goes bankrupt, the stock becomes worthless, and you are out your
      initial investment of $45.

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