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 January1, 20XX are as follows:

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:

(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?

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AT&T DuPont General Electric Intel Johnson& Johnson Kraft Merck Pfizer Procter & Gamble Verizon Price $30.00 46.00 18.00 24.00 66.00 37.00 38.00 22.00 67.00 41.00 Annual Dividend $1.76 1.64 0.68 0.84 2.28 1.16 1.68 088 2.10 2.00 AT&T DuPont General Electric Intel Johnson & Johnson Kraft Merck Pfizer Procter& Gamble Verizon Strike Price $32.00 52.50 20.00 27.00 72.50 40.00 40.00 25.00 72.50 45.00 Price of the Call $1.00 2.50 1.00 1.40 1.50 1.40 2.00 0.70 1.60 1.00