CFA Practice Question
An investor decides to increase his return on Dogmatic, Inc., by selling 10 covered calls on shares he holds long in an account with Churn Brothers Brokerage. The investor sells 10 May 55 calls for $2.50 on April 1st. At the time the options are sold, shares of Dogmatic are trading at $50.97. What is the initial margin requirement on this position?
A. The initial margin requirement on this position is 1000 shares of Dogmatic, Inc. common stock.
B. $5,500
C. $5,097
Explanation: In this example, the investor is selling 10 covered calls on Dogmatic, Inc. Since these calls are "covered," i.e. the investor owns the underlying shares, then the initial margin requirement is 100 shares of Dogmatic common stock for each contract sold. In this case 100 shares * 10 contracts = 1000 shares.
User Contributed Comments 8
| User | Comment |
|---|---|
| danlan | Where does the 100 shares come from? |
| mtcfa | One option always covers 100 shares. |
| jam99003 | mtcfa...can i sit by you during the exam? |
| ontrack | jam99003, have you read the ethics chapter? :) |
| Kuki | mtcfa...i believe 1 option is for 1 share. and 1 option CONTRACT would be for 100 shares. the question however doesnot mention contract. |
| takor | ontrack, does sitting by anyone during the exams violate any standards? Don't we all sit by someone?;-) |
| iambroke | guys go study |
| GBolt93 | kuki there's no difference. An option is always a contract and it's always for 100 shares. |