One popular strategy for traders is to sell covered calls. A covered call refers to a financial
One popular strategy for traders is to sell "covered calls".
A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security. To execute this an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream.
A trader owns 1,000 shares of IBM which currently has a price of $35. She sells 1,000 covered calls of IBM with strike price of $38.40 for a premium (price) of $2.00 per call and maturity 6 months from today (each call contract gives owner right to purchase one share at strike price).
On maturity date the price of IBM is $37. On maturity date.
How much will be the value of her IBM shares and premium she received (assume the premium was not invested and has not changed in the 6 months)