Damn sample II provide, limited, precisely, elsewhere, protection

jcole21

In Sample II, CFA states that covered calls provide "some" downside protection ....
what the h??
There's an inflow from the premium .. so it kind of give a floor value to the strategy (not zero, but the floor ...)
Anyway they say elsewhere that this strategy is precisely to be used when you think downside risk is limited, NOT when you want to protect from downside risk

Valores

I totally agree that it is a horrible question. Technically, he could sell a call option that is very deep in the money for a high premium (thus cashing out on the gain), but rarely would someone do that!

bpdulog

Yeah, that question was lame.

Unforseen

Covered calls do provide some downside protection. If you sell a call for a premium of $2, then you have downside protection of $2 on the stock that you own.