Question of the Week

Your client, Todd, owns 100 shares HAT stock in his taxable stock portfolio. The stock has been inactive for the last year and Todd expects it to have another sluggish year ahead. To help Todd increase his return on the stock and reduce risk, you would recommend which of the following strategies?

a) Sell a call on HAT stock
b) Buy a put on HAT stock
c) Sell a put on HAT stock
d) Buy a call on HAT stock

Answer:

The correct answer is a):

Since Todd owns the stock and expects another stagnant year ahead, he would employ a covered call strategy and sell a call on HAT stock. This strategy allows Todd to collect a premium on the call that he sells which also reduces his risk by the amount of premium received. He must deliver the stock to the purchaser of the call if the option is exercised.