Turki owns 100 stocks of Kuwait Co. (KC) with a cost of $35 a stock. The stock is currently trading at $54 a share. Turki believes the price of KC will fall to $45 a stock soon but over the longer term of 3 to 5 years, increase in value to $75 a stock. Being an intelligent investor, Turki would like to benefit from the expected near-term decline if it occurs. Therefore, Turki writes a covered call at a strike price of $55 and a premium of $2 (each call contract has 100 stocks)

(a)How will the covered call help Turki to profit if the expected price decline occurs?

(b) What is the maximum loss Turki can incur from the call?

(c)What is the theoretical maximum profit Turki can incur from the call?

Answer rating: 100% (QA)

Covered Call and Potential ProfitsLosses for Turki Scenario Turki expects the stock price of Kuwait ... View the full answer