(Q1) An investor writes a covered call with a strike price of $ 44 on a stock selling @ $40 for a $3 premium. The range of possible payoffs to the write of this covered call on the combined position is Answer: -$37 to $7 (Q2) The payoff diagram of the portfolio insurance (owing a stock and a put) has the same shape as the payoff diagram for Answer: BUYING A CALL OPTION. Thanks in advance.
Q1. Max Loss = 3-40 = -$37 Max Gain = -40+3+44 = $7 Q2. Long Call Just saw the edit. Q1. You can lose everything if the value of your stock goes to 0, but you still earn the option premium. So Max Loss = 3-40 = -$37 Max Gain is Cash inflow - Cash outflow. You bought the stock for 40, and you will receive no more than 44 for it. But you also receive the premium. Max Gain = -40+3+44 = $7 Q2. Owning the stock limits your downside since you wont be “naked” and won’t have to purchase the stock at the lower market price and sell it at the higher contract price. And since you already own the stock, you are entitles to receive all the gains.