Breakeven in short call

CFA Level I
#1

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

#2

68,5?

#3

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

#4

$56.50

#5

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?

#6

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.

#7

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

#8

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

#9

Sorry I got wrong. Dreary is correct… +1

#10

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

#11

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)

#12

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

#13

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

#14

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?

#15

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

#16

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

#17

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.

#18

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

#19

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

#20

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