25 22 1/2 Jul 29 3 7/8 77 1 1/8 25 25 Jul 131 2 3/8 73 2 1/4 25 27 1/2 Jul 45 1 3/4 14 3 3/41. Covered Call
A covered call position is one in which the owner of a stock sells a call option on the same stock. Construct a payoff diagram for a covered call position for Pineapple Inc., assuming that the call is written at a strike price of $ 25. What are the risks and rewards of the covered call position? In what way would the risks/rewards change if you wrote a call at a strike of $ 27.5 instead of $ 25?
2. A Bear Spread
A bear spread is a trade in which a call option at strike X1 is bought and another call at a lower strike price X2 is sold. Construct a payoff diagram and explain the risks and rewards from a bear spread created from call options of Pineapple Inc., with strike prices of $ 22.5 and $ 27.5. In particular, discuss why the name "bear spread" is appropriate for this position.
How would the position payoff and the risks/rewards change if you used strikes of $ 22.5 and $ 25 instead? Under what circumstances (i.e, your posture towards Pineapple Inc.) might you prefer this position over the first one?
3. Butterfly Spread
This position is created by buying a call with a high strike price X1, buying another call with a relatively low strike X2 and selling two calls at an intermediate strike X3.
Construct a payoff diagram and describe the risks/rewards from setting up a butterfly spread from the three call options of Pineapple Inc. given above.
4. Strangle
This position is created by buying a call with a high strike price and a put at a lower strike price. Construct a payoff diagram and explain the risks/rewards from setting up a strangle from calls of Pineapple Inc. at strikes of $ 22.5 and $ 27.5. How do the risks/rewards from the strangle compare to those from a straddle @ strike of $ 25? Under what circumstances might one position be preferred to another?