CFA Practice Question
An investor has just written a covered call on 100 shares of Intelligent Semiconductor, which she holds long in an brokerage account. On 1 October the investor writes 85 call on June 5th for $5.50. At expiration, the price of Intelligent Semiconductor shares is $132.50, and the shares are called away from the investor at the exercise price. Including the premium, how much money will this investor have received from the covered call position at expiration?
A. $13,750
B. $9050
C. $5,300
Explanation: Since this covered call was "in-the-money" at expiration, i.e. the underlying stock price was greater than the exercise price at expiration, the investor had her 100 shares called away at the exercise price ($85). In addition, this investor received a premium of $5.50 per share, for a total premium of $550. To calculate the total amount of money received from this covered call position, take the money received by the option holder, who "called-away" the shares at the exercise price, and add the initial premium received for selling the option. {[(Strike Price $85) * 100 shares] + [(Premium received $5.50) * 100 shares]}= $9050.
User Contributed Comments 13
| User | Comment |
|---|---|
| dimos | Without the covered call strategy, the amount received would have been $13250. So, compared to the covered call, the gain of the investor is $13250 - $9050 = $4200 |
| mtcfa | At expiration how does a covered call writer receive $9,050? She got $550 for writing the premium at the outset, and had to pay $8,500 for her stock. AT expiration she loses $4,750 and gains the same amount on the stock. She receives no money at expiration unless she sells her own position. |
| Carol1 | He was supposed to receive 13250 if he did not write the call, but receive 9050 with the covered call thus he lost 4200. |
| steved333 | He lost 4200, but who cares? The question just wants to know how much cash was received. 550 for the contract and 8500 for the stock. |
| avgas | Since he made a loss with the covered call, why was it "in-the-money"? |
| charliedba | The loss is due to the premium, and the option being in the money does not consider the premium. |
| Yohan3109 | are we suppose to know that the 100 stock was at 85$ they juste say its pay for 85 call........ |
| johnmullrooney | ya'll gotta read the question 100*132.5-(132.5-85)*100+5.50*100=9050 doesn't ask for P/L, just money received |
| yongsl88 | thanks for that explnation john |
| indrayudha | "how much money will this investor have received from the covered call position at expiration?" don't you think the premium of $550 would have been received earlier at the beginning of the contract? Had there been an option of $8500, it'd have gotten me. |
| Shcote | 85 call is misleading.. I was searching the exercise price and thought he bought 85 contracts. |
| birdperson | i was with you Shcote. it was confusing to me as well... |
| mikus | "received from the covered call" position is referring to the premium received from writing the call ($550) plus the dollar amount received from selling the portion of the underlying to meet the obligation of a call holder ($8,500). |