# Writing a covered Call

I am struggling with the Schweser answer to a derivatives question:

An investor writes a covered call with a strike price of \$44 on a stock selling at \$40 for a \$3 premium. The range of possible payoffs to the writer of this covered call on the combined position is:

In my opinion the investor is short the stock + Long Call, right? He writes the covered call, so that should be his position.

The range of possible payoffs should be -7 (if stock>=44) and 37 (if stock=0). The correct answer according to Schweser is: If stock >=44 the gain is7. If stock=0 the loss is 37. Isn’t that the payoff of the buyer of a covered call strategy or am I getting things mixed up here? Thanks a lot.

He’s writing (selling) a covered call: he’s long the stock (that’s the covered part) and short the call (that’s the writing (selling) part.

Ok, thanks for clearning things up. I thought he was writing the strategy, i.e. selling the strategy which would be selling the stock and buying the call. So the terminology “writing a covered call” only refers to the call and not to the stock. Great help, thanks.

My pleasure.

-\$37 min and max is \$7

Min: loses all \$40 in stock, but gains \$3 in call premimum = -\$37

Max: Stock price increases to the Strike price of \$44 for a \$4 gain, and combining the Call premium, that leads to a max gain of \$7. Any further stock increases will be washed out by the Call being executing above \$44

It’s important that you determine whether the position is covered or naked. I’ve run into difficulty assuming a naked call was covered or vice-versa. It can be extremely confusing and frustrating.