Economics · Financial Derivatives
A portfolio manager holds 1,00,000 shares of BlueChip Ltd. which he believes will remain stable but will not rise significantly over the next two months. To generate extra income (yield enhancement) on the portfolio, the manager decides to sell 1,00,000 Call Options with a strike price slightly above the current market price. What is this strategy called, and what is its primary risk exposure?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Naked Call; The risk is unlimited loss if the stock price rises.
- 2Covered Call; The risk is the stock price rising significantly, leading to foregone profit.✓
- 3Long Straddle; The risk is high transaction costs.
- 4Protective Put; The risk is the stock price falling significantly.
Correct answer
Covered Call; The risk is the stock price rising significantly, leading to foregone profit.
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