Covered Call Strategy
a. Evanston Insurance, Inc., has purchased shares of Stock E at $50 per share. It will sell the stock in six months. It considers using a strategy of covered call writing to partially hedge its position in this stock. The exercise price is $53, the expiration date is six months, and the premium on the call option is $2. Complete the following table:
b. Assume that each of the six stock prices in the table's first column has an equal probability of occurring. Compare the probability distribution of the profits (or losses) per share when using covered call writing versus not using it. Would you recommend covered call writing in this situation? Explain.