Derivatives

sanbiz20
Finance Junkie
Posts: 53
Joined: Sat Apr 01, 2017 2:12 pm

Derivatives

Postby sanbiz20 » Tue Sep 26, 2017 8:05 am

In case of covered call should the seller of the covered call consider only the downward loss. Should the seller not consider any upside loss if the market price of the stock rises above the strike price at the date of expiry? Kindly suggest

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edupristine
Finance Junkie
Posts: 890
Joined: Wed Apr 09, 2014 6:28 am

Re: Derivatives

Postby edupristine » Fri Oct 06, 2017 7:19 am

Selling covered call options can help offset downside risk or add to upside return, but it also means you trade the cash you get today from the option premium for any upside gains. The main objective of using this strategy are:

--Earning a return from the underlying that is already owned
--Lowering the cost of acquisition of the underlying asset

If the share price falls in the market, than the buyer of the covered call wont exercise the call option. Hence the premium received by the seller of covered call, will be the only gain in such transaction lowering the cost of the underlying.

Maximum Profits when the options are exercised by the buyer
Premium received + Strike Price –Spot Price

If the options are not exercised the trader gets to keep the premium, thus lowering the cost of acquiring the asset


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