Breakeven in short call

your payoff is 70-65= 5 dollar loss+3.5(premium)= 1.5 loss

the idea of writing a covered call is to minimize your downside risk, by the amount of premium, while keeping your upside risk up to the point of new strike price. At expiration stock price > strike price (your call will get call, you’ll have to deliber shares, so you no participation in the capital gain, only get to keep the premium) stock price < strike price > your cost of buying the stock, (you get to pocket the premium, and the capital gain) stock price < cost price (as long as doestn’ fall by more than the cost of your premium, you’ll pocket the difference of premium and fall of stock. but if your stock falls more than the premium you received, then your loss is any additional fall in stock in excess of 3.5) I don’t know how to incorporate the risky free rate, i’d assume that since you had bought the stock for 60, you’d have 1% so, it’d be 60.60 - (3.5 *1%) = 57.065

saurua_s, please make sure that you always post the full question and answer.

I think that the easy way to understand this question is to break it down. You purchase a stock for $60, which is an outflow of $60 from you. You sell a call option for $3.50, which is an inflow of $3.50 to you. This lowers your overall purchase price to $56.50. So, if the stock price drops down to $56.50, you broke even on your trade. Anytime that you sell a call option, what you are basically doing is lowering your average purchase price to lower your downside risk at expense of giving up your upside potential above the strike price, which would go to the purchaser of the call option. Does this help?

rlange, yes that’s what I wrote above, but 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.

According to Schweser (Book 5, p243) the break even is simply (S - premium)…the risk free rate doesn’t apply