Chap 2 Covered Call Writing

Question 1

Conservative Covered Call Write

Answer 1

Selling a call option while simultaneously owning the obligated number of shares of the underlying stock

Question 2

Downside Break-Even Point

Answer 2

Stock price minus call price

Question 3

Incremental Return Concept

Answer 3

Strategy of rolling up for to a predetermined target price then allowing the stock to be called away

Question 4

Net Price

Answer 4

The cost of a covered writing position, subtracting the call price from the stock price

Question 5

Rolling Down

Answer 5

Buying back a call and selling a longer-term call with the same striking price

Question 6

Rolling Forward

Answer 6

Buying back a call when the stock price drops then selling a call with a lower striking price

Question 7

Rolling Up

Answer 7

Buying back a call when the stock price rises and then selling a call with a higher striking price

Question 8

Total Return Concept

Answer 8

Strategy of writing calls near the striking price to achieve the best balance between maximum potential return and downside protection

Question 9

What is the primary objective of covered writing

Answer 9

To increase profit through stock ownership

Question 10

Combined Write

Answer 10

Writing half of the position against in-the-money and half against out-of-the-money on the same stock

Question 11

Rolling down generally reduces the BLANK of the postion?

Answer 11

Max profit potential

Question 12

Simultaneously buying one call and selling another results in a BLANK postion?

Answer 12

Spread

Question 13

The key to successfully implementing the incremental return strategy is to?

Answer 13

Roll for credits

Question 14

A covered call write generates a loss when?

Answer 14

The stock falls by a distance greater than the call option premium

Question 15

The downside break-even point for a covered write is?

Answer 15

Stock price minus call price

Question 16

A covered write will outperform owning the outright stock in what situation?

Answer 16

All if it goes up down or stays the same

Question 17

Before taking a position an investor should compute

Answer 17

return if unchanged, downside break-even point and return if exercised

Question 18

What are the downsides of rolling up?

Answer 18

Downside break-even point is raised, debits are incurred and loss potential is increased -++++++

Question 19

The total return strategy of a covered write?

Answer 19

With an out-of-the-money option you are ultimately betting on an increase in the stock leveraged stock ownership

Where as with an in the money covered write you are taking a total position to benefit off of an increase in the stock price and the premium and can make money in any circumstance

For the total return you need to consider the max profit potential as well as the downside protection and be willing to have the stock called away if necessary to meet returns

When selling far out of the money options in a covered write you are ultimately using a stock ownership not covered write strategy