Series 7 practice questionmediumOptions — Covered Call Scenario
An investor buys 100 shares of RST at $48 and writes 1 RST Apr 50 call at $3. If the stock is called away at expiration, what is the total return?
- A$200
- B$300
- C$500✓ Correct answer
- D$800
Explanation
Why C — $500
Stock gain: $50 - $48 = $2 per share. Premium received: $3 per share. Total return: $2 + $3 = $5 per share, or $500. When a covered call is exercised, the investor sells at the strike price and keeps the premium. This is also the maximum profit for this position.
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