An investor buys a stock for $60 and sells a 3 month call on the stock with a strike price of $65 at a premium of $3.50 Risk free rate is 4% The breakeven underlying stock price at expiration is ? Thanks S

68,5?

Is covered call a short call or short put? How did you arrive at that answer? S

$56.50

covered call is a long position in a stock and a short call he arrived @ it by X+premium= 68.5 however I think the answer might be 61.5 do you know the answer?

The choices are: 55.85, 56.4, 60.8, 61.4 Please explain your answer. I think 68.5 but surely it is not there amongst the choices.

Oops! Dreary is right, 56.5 is the right answer break even of covered call= stock price - premium I thought it was strike price, nice dreary

To be exact, $56.50 + lost interest on $56.50, so that’s $57.07 Correct?

Sorry I got wrong. Dreary is correct… +1

I haven’t seen a Q that incorporates the risk free and a covered call, wouldn’t know if thats correct or not

getterdone Wrote: ------------------------------------------------------- > I haven’t seen a Q that incorporates the risk free > and a covered call, > > wouldn’t know if thats correct or not You use the risk-free when you calculate the payoff the option…not the breakeven (this is my understanding)

getterdone Wrote: ------------------------------------------------------- > Oops! Dreary is right, 56.5 is the right answer > > break even of covered call= stock price - premium > > I thought it was strike price, nice dreary Can you explain why BEP is stock price - premium? S

if you write the call then your breakeven is your purchase price minus the premium best explained by an example: $60 stock $65 strike price $3.5 premium if the stock closes @ 64.50 (hence will not be called) your profit is the premium and price appreciation of the stock 60-3.5= 56.5 64.5-56.5= 8

You paid $60 for the stock, but you received $3.50 from selling the option. So, your net outfow is $56.50. If the stock price rises to $56.5 you break even. The only issue is that you have lost interest for 3 months on your money. So, I think, you should add that to the breakeven point, and it becomes $57.07. Could someone confirm?

Dreary that seems correct to me but if someone could verify that would be great!

Dreary Wrote: ------------------------------------------------------- > You paid $60 for the stock, but you received $3.50 > from selling the option. So, your net outfow is > $56.50. If the stock price rises to $56.5 you > break even. > So what is the general expression for profit on covered call and where is the option component? S

I don’t see how any of the options you gave are possible. Seems $60 stock price declining by the premium received for selling the call at $3.5 would imply you are cash neutral at $60-$3.5, or $56.5.

So what is the idea of covered call - i thought we are selling upside potential which we think is not likely? I am just not able to correlated with low breakeven point/ Can somebody explain it intuitively? S

the reason for writing a covered call is that you do not believe the stock price will appreciate anytime soon and that you want to increase your income by collecting the premiums on the call

what are the payoffs (max loss, max gain etc) when the stock’s price at expiry is 70 in this case? S