Difference between covered call writing and writing put

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Reference no: EM131947880

The current price of an asset is $10.

(a) Suppose we write a call option (exercise price $10) on the asset, and, to avoid loss if the call is exercised against us, suppose we also buy the asset (paying $10). (This is called covered call writing). Compute the value of this strategy, measured at the option maturity, for asset prices of $9.80, $9.90, $10, $10.10, and $10.20. That is, construct a chart similar to the chart in the solution to 9b in Practice Problems Set 1. Make a guess at the result for more asset prices and plot the result.

(b) Now suppose that instead of writing the call and buying the asset, we write a put (exercise price $10). Compute the value of this written put, measured at maturity, again for asset prices of $9.80, $9.90, $10, $10.10, and $10.20, and again, make a guess at the result for more asset prices and plot the result..

(c) Based on parts (a) and (b) what is the difference between covered call writing and writing a put? Which strategy is riskier? Explain.

Reference no: EM131947880

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