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Adam Smith just purchased 700 shares of AT&E at $54.44, and he has decided to write covered calls against these stocks. Accordingly, he sells 7
Adam Smith just purchased 700 shares of AT&E at $54.44, and he has decided to write covered calls against these stocks. Accordingly, he sells 7 AT&E calls at their current market price of $5.32. The calls have 3 months to expiration and carry a strike price of $56.00. The stock pays a quarterly dividend of $0.48 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 $56.00 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 $56.00 a share? C. Does this covered call position offer any protection (or cushion) against a drop in the price of the stock? Explain. Adam Smith just purchased 700 shares of AT&E at $54.44, and he has decided to write covered calls against these stocks. Accordingly, he sells 7 AT&E calls at their current market price of $5.32. The calls have 3 months to expiration and carry a strike price of $56.00. The stock pays a quarterly dividend of $0.48 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 $56.00 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 $56.00 a share? C. Does this covered call position offer any protection (or cushion) against a drop in the price of the stock? Explain
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