This problem combines the Dogs of the Dow strategy discussed in Chapter 12 and writing covered calls. The prices of the Dow stocks and their annual dividends as of January 1, 20XX are as follows:

Price Annual Dividend AT&T $30.00 $1.76 DuPont 46.00 1.64 General Electric 18.00 0.68 Intel 24.00 0.84 Johnson & Johnson 66.00 2.28 Kraft 37.00 1.16 Merck 38.00 1.68 Pfizer 22.00 0.88 Procter & Gamble 67.00 2.10 Verizon 41.00 2.00 Instead of buying and holding the Dogs of the Dow for the year, you buy 100 shares of each dog and sell a one-year call option against each stock. Since most options are for less than a year, you have to sell a LEAPS (Long-Term Equity AnticiPation Security)
that has a one-year expiration date. The strike prices and market prices of the LEAPS are as follows:
Strike Price Price of the Call AT&T $32.00 $1.00 DuPont 52.50 2.50 General Electric 20.00 1.00 Intel 27.00 1.40 Johnson & Johnson 72.50 1.50 Kraft 40.00 1.40 Merck 40.00 2.00 Pfizer 25.00 0.70 Procter & Gamble 72.50 1.60 Verizon 45.00 1.00 (Since the Dogs of the Dow invests an equal dollar amount in each stock, the above strategy is not an exact application of the strategy. Buying 100 shares of each stock, however, significantly reduces the work necessary to answer the following questions.)

a) What is the strategy’s initial cash outflow?

b) What is the total of the dividends received for the year? What assumption is necessary to derive that answer?

c) If the price of each stock rises by $5 or $15, what is the profit or loss on the strategy, including dividend payments?

d) If the price of each stock declines by $5 or $15, what is the profit or loss on the strategy, including the dividend payments?

e) Given the answers to the previous questions, is the strategy viable and, if so, for which investors?