Series 7 practice questionmediumOptions — Covered Call Opportunity Cost
An investor buys 100 shares of XYZ at $45 and writes 1 XYZ Jun 50 call at $3. XYZ rises to $60 at expiration. What is the opportunity cost of writing the covered call?
- A$500
- B$700✓ Correct answer
- C$1,000
- D$1,200
Explanation
Why B — $700
With the covered call, the stock is called away at $50. Actual profit = ($50 - $45) + $3 = $8 per share = $800. Without the call, profit would have been $60 - $45 = $15 per share = $1,500. Opportunity cost = $1,500 - $800 = $700. The investor gave up $700 in additional gains by writing the call.
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