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An investor owns a share of 3M (originally purchased at $55) and writes a call option
on the same stock and sells it for $3.00 with an exercise price of $55.
a. In what type of strategy has the investor engaged?
Answer
This strategy is known as "Covered Call", when investor write a call on an
asset together with buying the asset.
b.Construct a table showing the profit (loss) to the investor assuming the following stock
prices when the call option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you must
consider both the profit (loss) on the 3M stock and the option.)
exercise
selling cost
$55.00
$3.00
Answer
Stock Price
profit
$30.00
$(22.00)
$35.00
$(17.00)
$40.00
$(12.00)
$45.00
$(7.00)
$50.00
$(2.00)
$55.00
$3.00
$60.00
$3.00
$65.00
$3.00
$70.00
$3.00
c. Now assume instead of writing a call option, the investor bought a put option at th+A47e
same price. What type of strategy is this?
Answer
Protective Put strategy that aim to guarantee minimum proceeds equal to the put’s
exercise price.
d. Given (c) above, construct a table showing the investors profit (loss) assuming the
following stock prices when the put option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70.
(Note you must consider both the profit (loss) on the 3M stock and the option.)
exercise
selling cost
$55.00
$3.00
Answer
Stock Price
profit
$30.00
$(3.00)
$35.00
$(3.00)
$40.00
$(3.00)
$45.00
$(3.00)
$50.00
$(3.00)
$55.00
$(3.00)
$60.00
$2.00
$65.00
$7.00
$70.00
$12.00
