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) $72,270
B) $108,770
C) $144,540
D) $289,080

Question

Quizplus · Accepted Answer

The maximum amount of funds is calculated by determining the number of contracts you can write. The portfolio value is $2 million, and the index value is 541.86. The number of contracts is $2,000,000 / (541.86 * 100) = approximately 36.9, rounded down to 36 contracts. Each contract has a premium of $7.30, so 36 contracts generate 36 * 7.30 * 100 = $26,280. However, since the portfolio beta is 1.40, you can write 1.40 times more contracts, which is 36 * 1.40 = 50.4, rounded down to 50 contracts. Therefore, the maximum funds generated is 50 * 7.30 * 100 = $36,500.

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