1. **Problem Statement:** You own a stock bought at $40 and want to take profit at $50. You have European call and put options with strike price $50, costing 2 and 1.51 respectively, expiring in 6 months. The risk-free rate is 2% p.a. The question is what to do in the option market to increase profit and the name of this strategy. 2. **Understanding the Situation:** You want to lock in a profit if the stock price reaches $50. Since you own the stock, you can use options to protect or enhance your position. 3. **Relevant Concept - Covered Call:** A common strategy is to sell a call option on the stock you own. This is called a **covered call**. - You own the stock (long stock). - You sell a call option with strike $50. 4. **Why Covered Call?** - You receive the call premium ($2) upfront, increasing your income. - If the stock price rises above $50, the call will be exercised, and you sell the stock at $50, achieving your target profit. - If the stock price stays below $50, you keep the premium and the stock. 5. **Calculations:** - Initial stock cost: $40 - Call premium received: $2 - If stock price reaches $50, your profit = $(50 - 40) + 2 = 12$ 6. **Summary:** By selling the call option (writing a call), you increase your profit potential by the premium received while setting a target sell price at $50. **Final answer:** You should **sell the call option** with strike $50 on the stock you own. This strategy is called a **covered call**.