Question of the Week

Which TWO statements are TRUE about writing covered calls?

I. The maintenance margin requirement is 25%.
II. Physical delivery may be required upon exercise.
III. The writer has cash on deposit equal to the cost to purchase the shares from the option holder.
IV. It is a bearish strategy.

a) I and IV
b) II and III
c) II and IV
d) I and II

Answer: The correct answer is c)

I is incorrect because there is no margin requirement.
III is incorrect because a call writer must have the shares on deposit. A put writer is required to have the cash equivalent.