Explanation:
A covered call strategy involves owning the underlying asset and selling call options on that same asset. The goal of this strategy is to generate additional income from the option premium, while also providing some protection against potential losses if the asset's price falls.
Analysis of the scenario:
$44$48 (above current price)$48 > $44, the call options with strike $48 are out-of-the-moneyWhy D is correct: By selling out-of-the-money calls with a strike of $48, the trader earns the premium while still having room for the stock to appreciate from $44 to $48. If the stock stays below $48 at expiration, the trader keeps the premium as profit. If the stock rises above $48, the trader is obligated to deliver the stock at $48, but still benefits from the appreciation up to $48 plus the premium.
Why other options are incorrect:
$44 and strike at $44, the call would be at-the-money, not in-the-money. Also, an at-the-money call has a higher premium than an out-of-the-money call, which would not be optimal when expecting the price to stay below $48.No comments yet.
Q.765 Mahesh Kumar has recently joined Singapore Standard Bank, the largest investment banks in South-East Asia. Kumar has analyzed an open position his bank has in the stock of a Singaporean carmaker. The current value of the stock is $44, but he believes that the price of the stock will have trouble reaching above $48 because of technical and fundamental factors. Kumar called one of the bank's traders and shared his analysis regarding the stock. The analyst informed the manager that he is going to lock the profit with a covered call strategy. How exactly is he going to apply the covered call?
A
Since the bank already owns the stocks, the trader is going to buy out-of-the-money call options at the strike price of $48.
B
Since the bank already owns the stocks, the trader is going to sell in-the-money call options at the strike price of $44.
C
Since the bank already owns the stocks, the trader is going to buy at-the-money call options at the strike price of $44.
D
Since the bank already owns the stocks, the trader is going to sell out-of-the-money call options at the strike price of $48.