Series 7 practice questionmediumOptions — Covered Call Calculation
An investor buys 100 shares of RST at $50 and writes 1 RST Jul 55 call at $3. What is the maximum profit on this covered call position?
- A$300
- B$500
- C$800✓ Correct answer
- D$200
Explanation
Why C — $800
Maximum profit on a covered call occurs when the stock is called away at the strike price. Stock gain: $55 - $50 = $5 per share, plus the $3 premium received = $8 per share. Total: $8 x 100 = $800. The writer gives up gains above $55 in exchange for the premium income.
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