Angelo Martino just purchased 500 shares of AT&E at $61.50, and he has decided to write covered calls against these stocks. Accordingly, he sells five AT&E calls at their current market price of $5.75. The calls have 3 months to expiration and carry a strike price of $65. The stock pays a quarterly dividend of $0.80 a share (the next dividend to be paid in about a month).
a. Determine the total profit and holding period return Angelo will generate if the stock rises to $65 a share by the expiration date on the calls.
b. What happens to Angelo’s profit (and return) if the price of the stock rises to more than $65 a share?
c. Does this covered call position offer any protection (or cushion) against a drop in the price of the stock? Explain.

  • CreatedApril 28, 2015
  • Files Included
Post your question