In Sample II, CFA states that covered calls provide “some” downside protection … what the h?? There’s an inflow from the premium … so it kind of give a floor value to the strategy (not zero, but the floor …) Anyway they say elsewhere that this strategy is precisely to be used when you think downside risk is limited, NOT when you want to protect from downside risk
That seems correct – a protective put is the best downside protection
I totally agree that it is a horrible question. Technically, he could sell a call option that is very deep in the money for a high premium (thus cashing out on the gain), but rarely would someone do that!
Yeah, that question was lame.
Covered calls do provide some downside protection. If you sell a call for a premium of $2, then you have downside protection of $2 on the stock that you own.