Given S0(stock price), C0(call premium) and X(exercise price). What is the maximum profit of a covered call? Can you please give a simple interpretation, or an easy way to memorize it?
Seller of a Covered Call: Received C0 for the call option premium. -Max(0,St-X) is the profit made due to the call option (which he loses) St - So is the profit on the stock (which he gains) So Profit = -Max(0,St-X) + St - S0 + C0 If the Call is in the money: -(St-X) + St -S0 + C0 = X-S0+C0 — Max Profit.
you just bought a stock S0 ( microsoft) you write a call option on it and pocket the premium C0 ( sold to your brother in law) all of a sudden google annouces it will buy microsoft and fire steve ballmer immediately microsoft rallies as soon as it hits the strike price your lousy brother in law comes grinning and exercises call at strike price thats the best case scenario right in which case u sell the stock to your brother in law for X plus earlier Call premimun C0 less the cost paid for S0 X-S0+C0 — Max Profit you cant remember it this way or cp’s then i dont know mayne
Thanks. Both strategies work for me. I’ve never thought of pimpineasy’s method. Sounds crazy, but does make sense.
no covered call has upper limit for profit Charles
rivercharlesy Wrote: ------------------------------------------------------- > no > covered call has upper limit for profit > > Charles Nothing wrong. The profit is capped by X. So Max is X-So+Co. e.g., X=50, So=45, Co =2, then max profit is 50-45+2=7. Whatever the St is, you can not earn more than $7.
Thanks, I did not remember all the formulas. only get the concepts in mind. Thanks for your illustration. Charles