Chapter 04 · Section 4.1

Case Study- Colgate Calls

Linda has $5000 in cash and 300 fully-paid Colgate stocks in her account. She forsees a quiet market and seeks a greater return by selling Colgate Nov 35 calls quoted at $4.00. Colgate stock is currently trading at $38.

If she writes 2 Colgate Nov 35 calls, her initial margin requirement will be:

• a) $2320 = (20% of 3800 + 400) * 2
  No. If Linda were not covered, $2320 would be the initial margin requirement. Since she owns 300 Colgate shares, by selling 2 Colgate call options, she is a covered writer.
  b) $1720 = [20% of 3800 + 400 - (38 - 35) * 100] * 2
  c) $7000 = (35 * 100) * 2
  d) zero

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