Example :
1) The price of XYZ Ltd. stays at or below Rs.
4000. The Call buyer will not exercise the Call Option. Mr. A will keep the
premium of Rs. 80. This is an income for him. So if the stock has moved from
Rs. 3850 (purchase price) to Rs. 3950, Mr. A makes Rs. 180/- [Rs. 3950 – Rs.
3850 + Rs. 80 (Premium) ] = An additional Rs. 80, because of the Call sold.
2) Suppose the
price of XYZ Ltd. moves to Rs. 4100, then the Call Buyer will exercise the Call
Option and Mr. A will have to pay him Rs. 100 (loss on exercise of the Call
Option). What would Mr. A do and what will be his pay – off?
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a) Sell the Stock in the market at
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:
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Rs. 4100
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b) Pay Rs. 100 to the Call Options buyer
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:
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- Rs. 100
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c) Pay Off (a – b) received
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:
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Rs. 4000
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(This
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was
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Mr.
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A’s
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target price)
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d) Premium received on Selling Call Option
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:
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Rs. 80
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e) Net payment (c + d) received by Mr. A
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:
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Rs. 4080
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f) Purchase price of XYZ Ltd.
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:
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Rs. 3850
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g) Net profit
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:
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Rs. 4080 – Rs. 3850
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= Rs.
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230
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h) Return (%)
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:
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(Rs. 4080 – Rs. 3850) X
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100
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Rs. 3850
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=
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5.97% (which is more than
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||||
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the target return of 3.90%).
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The payoff schedule
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ANALYSIS
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XYZ Ltd. price closes at
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Net Payoff
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(Rs.)
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(Rs.)
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3600
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-170
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3700
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-70
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3740
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-30
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3770
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0
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3800
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30
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3900
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130
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4000
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230
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4100
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230
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4200
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230
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4300
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230
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The payoff chart (Covered Call)
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+ =
Buy Stock Sell Call Covered Call
