CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
An investor owns shares of a company and wants to generate additional income, accepting that she will give up gains above a certain share price. Which strategy is she most likely using?
She is most likely writing a covered call. The premium received adds income, but if the share price rises above the strike, the shares may be called away, so her gains above the strike are given up.
- AWriting a covered callCorrect
- BBuying a protective put
- CWriting a naked put
Explanation
Writing a call on shares already owned earns the premium and caps upside at the strike price. A protective put costs a premium and keeps upside. A naked put does not involve owning the shares and obligates her to buy.
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