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Draw a payoff diagram of the stock

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You own a dividend paying stock that is currently trading at $50. You want to earn additional income by selling a call option. There are two call options with the same maturity date in two months that are available for you to sell. One of the call options has a strike price of $55 and the other has a strike price of $60. Which call option would you choose and why, if you believe the stock price has low volatility? Which call option would you choose and why, if you believe the stock price has high volatility? What other reasons would you choose one call option over the other? Draw a payoff diagram of the stock and call options respectively (note: the y-axis is the payoff and the x-axis is the stock price at maturity).

Reference no: EM133005024

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