On March 15, Donna, CFA, purchases 500 shares of Amalgamated Ores, Inc. (AMO) at 45. At the same time, she sells 10 AMO MAY call options with a strike price of 50 at 2. With this strategy, on the day the options expire, what is the breakeven point? 10 ( x-45) + 2* 10 = 0 x= 43 Am I right? the answer is " Not lose money if AMO closes between 41 and 59" Confused.
So she collects $2000 from selling 10 calls @ 2. She will lose $2000 in the stock if AMO drops $4 share (4*500 = 2000) so 41 is the lower breakeven point. If stock rises above 50 the calls are exercised. Half of them are covered so she won’t lose money. The other half are uncovered so she loses $500 for each dollar over 50. She’s got a little bank account from when she started = $2000 for option premium + $2500 from stock rise 45 ->50. Taking these together we find that if the stock rises 9 points above 50 she loses all her gains as 9*500 = 2000 + 2500.
i don’t understand this can someone simplyfy please?
hi Joe i did not understand ur calc 2000, how did u get this 10*2=20 i feel please elaborate this cheers abhi
Joey’s right. She spent 500 * 45 = -$22500 She received in option premium= $2000 Her net expense = -$20500 she has 5 calls naked. Upon expiration, if stock price > $50: She collects 500 * 50 = +25000, The naked calls (NC) value = [stock price (SP) - strike price (TP)] * 5 calls*100 (shares per contract) Breakeven = 0 = what she collects - what she spends = +$25000 -$20500 - NC value Solve for NC, NC value = $4500, so whenever the naked calls are worth $4500 she will break even. This happens when $4500 = (SP - $50) * 5 calls * 100 (shares per contract) = 500 SP - 25000 SP = $29500 / 500 = $59.
10 Calls (100 shares per call) * $2 = $2,000 income created from writing the call.