In a covered call strategy:
A) The gross payoff is greater than the net payoff.
B) The gross payoff is equal to the net payoff.
C) The gross payoff is smaller than the net payoff.
D) None of the above is always true.

Question

Quizplus · Accepted Answer

In a covered call strategy, the net payoff is the premium received for selling the call option, minus any transaction costs. The gross payoff is the sum of the net payoff and the stock's capital gain if the stock price goes up and the option is exercised. Therefore, the gross payoff is always equal to or greater than the net payoff. However, if the stock price drops and the option is not exercised, the gross payoff will be smaller than the net payoff, as the investor would have suffered a capital loss on the stockholdings.

In a Covered Call Strategy