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 number of contracts you could write on a margin account basis using the stock portfolio as collateral?
A) 99
B) 149
C) 198
D) 396

Question

Quizplus · Accepted Answer

The maximum number of contracts is determined by the collateral value divided by the index value, adjusted for the portfolio beta. The collateral value is $2 million, and the index value is 541.86. The portfolio beta of 1.40 implies higher risk, so the effective collateral is $2 million / 1.40. Each contract covers 100 times the index value, so the maximum number of contracts is ($2 million / 1.40) / (541.86 * 100) = 198.

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