# covered call strategy

The current market price of NTSC is \$44 per share. One-year call options written on NTSC with strike price \$50 are priced at \$4.25. John Harris plans to implement a covered call strategy NTSC using these calls, and covering 1000 shares. What will the per-share expiration proflt/loss be on this strategy f the NTSC is priced at \$56 at expiration? A. \$16.25. B. \$10.25. C. \$4.25. d). \$1.75.

covered call = long position in stock and short position in call options on underlying stock profit = stock capital gains + call option premium = 50 - 44 + 4.25 = 10.25 = B So, ignoring all taxes and transaction costs, John only profits from his shares of NTSC up to \$50 because afterwards, his shares get called away. He earns \$6.00/share in capital gains and \$4.25/share in proceeds from writing the call options (i.e. earning the option premium).

Are you sure? What about the fact that the price is 56 at expration? He’s gonna have the stock called away, isn’t he?

agreed with hiredguns.

YUP IT IS 10.25. AGREED WITH THE LOGIC.

I understand that the maximum gain on this position would be stock appreciation + option premium, 6+4.25=10.25. But wouldn’t this only occur if price of stock at expiration equals the option strike price of \$50?

Annasmom, the covered call would produce \$10.25 of gain if the stock price at expiration was \$50 or anything above \$50. If it is \$100 at expiration, the covered call still provides the premium and the \$6 of gain from \$44 to \$50. The writer of the covered call sold away the upside in exchange for the option premium, presumably because he or she didn’t think the stock would rise by very much.

You bought the stock at \$44 You sold a call which gives the buyer the right to purchase the stock at \$50. Ignoring brokerage costs, At 50.01 the stock is called and you get .01 At \$56 the stock is called and you get \$50 At \$560 the stock is called and you get \$50 At \$5,600 the stock is called and you get \$50 etc. Covered calls do not have unlimited upside… it is capped by the call strike price

OK, thanks. I guess I misunderstood the question, then. The call option writer makes \$10.25. I guess I was getting confused about the stock getting called away.

oops, in my pst above it should say At \$50.01 the stock is called and you get \$50

i always think of it this way…own the stock for 44, sell the 50 call for 4.25 is like shorting stock at 54.25 if expires in the money…54.25 less 44…

if the stock is at 54 dollars, would it be called? Since the premium is 4.25 i assume they wont call the stock until it reaches 54.25… right?

come on ancientmtk, think it through again. Of course the stock is called away.