Suppose you are managing a stock portfolio currently valued at $2 million that has a portfolio beta of 1.40 and you are interested in call option overwriting to raise additional funds. If the S&P 100 index recently closed at 541.86 and a February 580 OEX 100 call option contract has a premium of 7.30, what is the maximum amount of funds you could generate by writing calls on a cash account basis using the stock portfolio as collateral?
A) $18,980
B) $26,280
C) $33,580
D) $40,880

Question

Quizplus · Accepted Answer

The maximum amount of funds is calculated by determining the number of call option contracts you can write. The portfolio value is $2 million, and the S&P 100 index is at 541.86. Each option contract covers 100 shares, so the number of contracts is $2,000,000 / (541.86 * 100) = approximately 36.9, rounded down to 36 contracts. The premium per contract is $7.30, so the total premium is 36 * 100 * $7.30 = $26,280.

Suppose You Are Managing a Stock Portfolio Currently Valued at $2