The combination of a position in a covered call and a position in a protective put on a stock index (where the options have the same strike and maturity) is similar to:
A) A leveraged long position in the stock.
B) A leveraged short position in the stock.
C) A long position in a balanced index fund (i.e., long stock and long investment at the risk-free rate).
D) A short position in a balanced index fund. (i.e., short stock and borrowing at the risk-free rate).

Question

Quizplus · Accepted Answer

The combination of a covered call and protective put on a stock index with the same strike and maturity is similar to a long position in a balanced index fund because it involves holding both long positions in the stock and long positions in risk-free investments. The protective put provides downside protection, while the covered call generates income from selling the call option. This strategy allows for some upside potential while protecting against losses.

The Combination of a Position in a Covered Call and a Position