Difference in writing call-new shares being sold by company

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Reference no: EM131992574

1. What is the difference between writing a call and new shares being sold by a company?

a. There is no profit/loss when the shares are sold under a call.

b. There is no risk to the investor of the call.

c. Shares outstanding do not change with the call.

d. There is no commission paid by the investor for writing the call.

2. Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are put and call options available at exercise prices of 30 and a time to expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100 options). Ignore the time value of money! Suppose the investor constructed a covered call, i.e. long stock and short call. What is the maximum profit and maximum loss from the transaction if the position is held to expiration?

a. $2,711, negative infinity b. $289, $(2,711) c. infinity, $(3,289) d. $3,289, $(3,000)

Reference no: EM131992574

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