Messi manages a discretionary account with complete derivatives authority. The account holds 100,000 shares of BARCA Limited, currently trading at HK$42.00. BARCA has an earnings announcement scheduled in one week. Although Messi expects an earnings increase, she expects the company to narrowly miss the consensus earnings estimate. She would like to protect the client’s position in the company until the report is released but wants to keep the cost of the protection to a minimum. Messi receives the following quotes for one-month options.

Call	Exercise price	Put
1.69	42.5	2.19

1. Should Messi use Covered Call or Protective Put strategy?
2. What are the maximum potential loss & and gain of the chosen strategy?
3. What are the limitations of the strategy ?

Answer rating: 100% (QA)

Messi should use a protective put strategy A covered call strategy would involve selling a call opti... View the full answer