Amy owns 100 shares (1 round lot) of ABC stock with a cost basis of $35 a share. The stock is currently trading at $54 a share. Amy believes the price of ABC stock will fall to $45 a share in the near future but over the longer term of 3 to 5 years, increase in value to $75 a share. Amy would like to benefit from the expected near-term decline if it occurs. Therefore, Amy writes a call covered (= not naked) at a strike price of $55 and a premium of $2.
(a) How will the call help Amy profit if the expected price decline occurs? Explain What would be her total profits? Show all calculations.
(b) What is the maximum loss Amy can incur from the call? Explain What would be her total profits? Show all calculations.
(c) What is the maximum profit Amy can incur from the call? Explain.