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Question 4 Suppose you own 1000 shares of stock in a company. You believe that the share price of this security is unlikely to vary
Question 4 Suppose you own 1000 shares of stock in a company. You believe that the share price of this security is unlikely to vary dramatically in the coming months and are considering writing a call option on the same stock. The current stock price is $100, and the call option exercise price is $120, with a call premium of $3. You are thinking of writing as many calls as you have stocks. a) Draw a diagram of the potential value of your portfolio from this strategy at expiry of the call. (5 Marks) b) What is the maximum loss possible for this strategy? For what value of the underlying stock price does this occur? (5 Marks) c) Suppose that at expiration the stock price is St=$140, what is the profit of the strategy at time T? (5 Marks) d) Is this strategy of adding a position in the option to your original holding of the stock a way of reducing your risk or taking a limited gamble
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