Series 7 practice questionmediumOptions — Writing Covered Calls Income
An investor owns 500 shares of GHI at $30 and writes 5 GHI Aug 35 calls at $2 each. If all options expire worthless, what is the income earned from this strategy?
- A$200
- B$500
- C$1,000✓ Correct answer
- D$1,500
Explanation
Why C — $1,000
Premium received per contract = $2 x 100 shares = $200. With 5 contracts: $200 x 5 = $1,000 total premium income. When the options expire worthless, the writer keeps the entire premium as profit and still owns the 500 shares of GHI. This is the maximum profit from the options portion of the strategy.
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