Investments, tenth edition

 Covered Calls 

 A     covered  call    position is the purchase of a share of stock with a simultaneous sale 

of a call option on that stock. The call is “covered” because the potential obligation 

to deliver the stock can be satisfied using the stock held in the portfolio. Writing an 

option without an offsetting stock position is called by contrast  naked option writ-

ing.  The value of a covered call position at expiration, presented in  Table 20.2 , equals 

the stock value minus the value of the call. The call value is  subtracted  because the 

covered call position involves writing a call to another investor who may exercise it at 

your expense.  

Profits

Profit on Stock

S

T

Profit on

Protective Put

Portfolio

−P

−S

0

S

0

 

= X

 Figure 20.7 

Protective put versus stock investment 

(at-the-money option)  

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bod61671_ch20_678-721.indd   691

7/25/13   2:50 AM

7/25/13   2:50 AM

Final PDF to printer

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