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Determine the total profit and holding period return

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Question - Martin just purchased 500 shares of Stroke Inc. at 61.50 and he has decided to write covered calls against these stocks. Accordingly, he sells five Stroke Inc. calls at their current market price of 5.75. The calls have three months to expiration and carry a strike price of 65. The stock pays a quarterly dividend of $.80 a share (the next dividend to be paid is about a month)!

Required -

(a) Determine the total profit and holding period return Martin will generate if the stock rises to $65 a share by the expiration date on the calls.

(b) What happens to Martin's profit (and return) if the price of the stock rises to more than $65 a share?

(c) Does the covered call position offer any protection (or cushion) against a drop in the price of the stock? Explain.

Reference no: EM133098617

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