Covered Call and Protective Put Strategy Numericals

Calculate the profit/loss for a covered call strategy where the stock price is $50, the strike price is $45, and the premium received is $3.

• $4

• $2

• $1

• $5

Answer explanation

To calculate the profit/loss for a covered call, subtract the premium received ($3) from the difference between the stock price ($50) and the strike price ($45), resulting in a profit of $2.

Determine the breakeven point for a protective put strategy with a stock price of $60, a put option strike price of $55, and a put option premium of $2.

• $50

• $54

• $57

• $58

Answer explanation

The breakeven point is calculated by subtracting the put option premium from the put option strike price. Therefore, $55 - $2 = $57. So, the breakeven point is $57.

Compare the risk-reward profile of a covered call strategy with a protective put strategy.

• The covered call strategy has unlimited risk with unlimited reward potential, while the protective put strategy has limited risk with limited reward potential.

• The covered call strategy has limited risk with limited reward potential, while the protective put strategy has limited risk with limited reward potential.

• The covered call strategy has limited risk with unlimited reward potential, while the protective put strategy has limited risk with limited reward potential.

• The covered call strategy has limited risk with limited reward potential, while the protective put strategy has unlimited risk with limited reward potential.

Answer explanation

The covered call strategy has limited risk with limited reward potential, while the protective put strategy has limited risk with limited reward potential.

Implement a covered call strategy using the following details: Stock price = $70, Strike price = $65, Premium received = $4.

• Sell a call option with a strike price of $65 for $4

• Buy a call option with a strike price of $70 for $4

• Sell a put option with a strike price of $65 for $4

• Sell a call option with a strike price of $70 for $4

Answer explanation

Selling a call option with a strike price of $65 for $4 is the correct choice for implementing a covered call strategy.

Implement a protective put strategy with the following information: Stock price = $80, Put option strike price = $75, Put option premium = $3.

• $83

• $78

• $70

• $85

Answer explanation

To implement a protective put strategy, add the put premium to the put strike price: $75 + $3 = $78. Then, add the stock price to get the protected price: $78 + $5 = $83. Therefore, the correct choice is $83.

Calculate the profit/loss for a covered call strategy where the stock price is $40, the strike price is $35, and the premium received is $2.

• $5

• $7

• $10

• $3

Answer explanation

To calculate the profit/loss, subtract the strike price ($35) from the stock price ($40), then add the premium received ($2). Therefore, the profit/loss is $7 ($40 - $35 + $2 = $7).

Determine the breakeven point for a protective put strategy with a stock price of $55, a put option strike price of $50, and a put option premium of $3.

• $57

• $53

• $60

• $48

Answer explanation

The breakeven point is the strike price plus the put premium, so $50 + $3 = $53. Therefore, the correct answer is $53.

Compare the risk-reward profile of a covered call strategy with a protective put strategy.

• The risk-reward profile of a covered call strategy is more conservative compared to a protective put strategy.

• A covered call strategy offers higher rewards but lower risks than a protective put strategy.

• The risk-reward profile of a protective put strategy is more conservative compared to a covered call strategy.

• The risk-reward profile of a covered call strategy is riskier compared to a protective put strategy.

Answer explanation

The risk-reward profile of a covered call strategy is more conservative compared to a protective put strategy.

Implement a covered call strategy using the following details: Stock price = $75, Strike price = $70, Premium received = $5.

• Sell a call option with a strike price of $75 for $5

• Buy a call option with a strike price of $70 for $5

• Sell a call option with a strike price of $70 for $5

• Buy a put option with a strike price of $70 for $5

Answer explanation

Answer Explanation highlighting the correct choice: Sell a call option with a strike price of $70 for $5

Implement a protective put strategy with the following information: Stock price = $85, Put option strike price = $80, Put option premium = $4.

• $89

• $82

• $88

• $75

Answer explanation

To implement a protective put strategy, add the put option premium to the put option strike price: $80 + $4 = $84. Then, add the current stock price to get the protected price: $84 + $5 = $89. Therefore, the correct choice is $89.