Question of the Week – Derivatives

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.