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Exhibit 15.2 Payoff diagram for a written call option position.
Strategies Using Written Call Options
Why would anybody wish to sell a call option if doing so subjects them to the possibility of unlimited
future liabilities? One answer is that speculators sometimes deem the risks worthwhile in light of the
expected reward. They may be confident that the underlying asset price will not rise and the option
will expire worthless.
Written call options can also be used to hedge in certain circumstances. Consider oil-exporting
nations such as Mexico and Venezuela. When oil prices are low, they are hungry for funds, funds that
are much needed for national development projects. When oil prices are high, they have plenty of
excess revenue. A reasonable strategy would be to sell high-strike-price oil call options when oil
prices are low. The country thus receives premiums when funds are most needed, and incurs a liability
that needs to be paid only when funds are most plentiful. The oil call options help to smooth the flow
of funds into the country. Abken and Feinstein, in their 1994 paper “Covered Call Options: A Proposal
to Ease Less Developed Country Debt,” elaborate on the use of written call options in such a setting.
Warrants
Warrants are call options that are sold by the company whose stock is the underlying asset. If
Microsoft pays its executive with Microsoft call options, those options would be called warrants.
When the warrants are exercised, the total outstanding supply of Microsoft stock would rise. Warrants
are valuable, even if they are not yet in the money. Clearly they must be worth something; otherwise,
executives would not want them and would give them away! Offering warrants as compensation to
executives is not free for the firm‟s shareholders. Stories abound nowadays of young Internet