Series 7 practice questionmediumOptions — Covered Call Max Loss
An investor buys 100 shares of TUV at $40 and writes 1 TUV Jun 45 call at $3. What is the maximum loss?
- A$300
- B$3,700✓ Correct answer
- C$4,000
- D$4,500
Explanation
Why B — $3,700
The maximum loss on a covered call occurs if the stock drops to zero. Loss = stock cost - premium received = $40 - $3 = $37 per share, or $3,700 per contract. The premium received provides only partial downside protection. The covered call writer still bears most of the stock's downside risk.
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