An investor owns $100,000 of convertible bonds with a conversion price of $50. By depositing into her account, how many covered calls could she write?
A) 2,000
B) 50
C) None
D) 20
Thank you so much advance 
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Hi @Terrence_Boyer - I’m happy to help with this question.
First thing - let’s establish what a covered call is:
- 100 shares of stock
- 1 short call option (on the same stock)
The convertible bond can be converted into a specified amount of common stock. To determine how many shares are obtained during a conversion, we can use the conversion ratio:
- CR = par value / conversion price
- CR = $100,000 / $50
- CR = 2,000
The $100,000 worth of convertible bonds may be converted into 2,000 shares of stock. Now that we know this, we can determine how many covered calls can be written against the bond if it’s converted. A short call requires 100 shares of stock to be considered covered; with 2,000 shares of stock, the investor can write 20 covered calls (2,000 shares / 100 shares needed per covered call). The answer should be D.
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@brandonrith Thank you Brandon. The logic makes sense. My only follow up Q is…in my thoughts …when I used CR= par / conv price… I automatically think of par as $1000. But in this case its the total value worth of the convertible bonds.
As for breaking down what a covered call actually means…this explains a lot. This is why I really enjoy achievable. Thank you
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Yep! It’s fine to assume $1,000 par if it’s not specifically mentioned in a bond-based question, but definitely go with what they provide in the question if it’s referenced (like it is in the question above).
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