Higher volatility: stock moves $1.10 per day

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  • Covered call outperforms ~62% of the time
  • You sold the 103 call at $.69…you expect to lose $.14 of probability-weighted excess return since the stock moves $1.10 per day instead of $1
  • This is confirmed by our binomial tree model where we compute option prices arithmetically. If the stock moves $1.10 per day the 103 call is worth $.83
 
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