Question
You are trying to determine the appropriate price for a 1-year European call with a strike price of $200 as part of your covered call
You are trying to determine the appropriate price for a 1-year European call with a strike price of $200 as part of your covered call strategy. The current stock price is $200/share, 1-year European puts with a strike price of $200 currently sell for $10, and the risk-free rate of interest is 3%/year. Using the put-call parity, what would you expect 1-year European calls with a strike price of $200 to sell for? Is margin required to sell covered calls? Explain. Calculate the margin required to sell this 1-year European call "naked".
The company faces a major lawsuit which may send it into bankruptcy. You want to retain your shares, but you also want insurance in case the lawsuit sends the company into bankruptcy. Describe an options strategy you could pursue to specifically mitigate the risk of bankruptcy. What is a default? How are stocks and bonds handled differently in bankruptcy?
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