Adam Smith just purchased

600

shares of AT&E at

$54.36,

and he has decided to write covered calls against these stocks. Accordingly, he sells

6

AT&E calls at their current market price of

$5.37.

The calls have 3 months to expiration and carry a strike price of

$57.50.

The stock pays a quarterly dividend of

$0.46

a share (the next dividend to be paid in about a month).

a.Determine the total profit and holding period return Adam will generate if the stock rises to

$57.50

a share by the expiration date on the calls.

b. What happens to Adam's profit (and return) if the price of the stock rises to more than

$57.50

a share?

c.Does this covered call position offer any protection (or cushion) against a drop in the price of the stock? Explain.