CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
An investor owns shares of a stock and writes a call option on the same shares with a strike price above the current share price, receiving a premium. Compared with holding the shares alone, this covered call position is best described as:
A covered call gives up upside above the strike price in exchange for premium income. The short call obliges the investor to deliver shares at the strike, capping gains, while the premium only partially offsets declines in the share price.
- Agiving up upside above the strike in exchange for premium incomeCorrect
- Bincreasing the loss if the share price rises sharply
- Cproviding full protection against a decline in the share price
Explanation
The written call caps the gains at the strike plus premium received. The premium only partly cushions a fall in price and does not give full protection. A price rise does not create a larger loss, since the shares gain value.
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