Assume that buying a share of Lotus’s stock at $55 per share while simultaneously writing a call option with an exercise price of $55 per share is called a covered call investment strategy. What is the relationship between covered call position and selling put options? Do the quoted put and call option prices appear to be consistent with this relationship? Assume that you buy the stock or write the call on January 18,1994 for February 19,1994.

(Hint: Start by calculating the profit or loss per share assuming that by February 19,1994, Lotus’s and AT&T’s common stock is selling at say $60 per share. Repeat this calculation for several other possible stock prices at the time of expiration that span a wide range above below and at the exercise price of $55 per share (e.g., $45, $50,$55,$64, and so on))

Answer rating: 100% (QA)

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