Series 7 practice questionhardOptions — Writing Calls Scenario
An investor writes 1 uncovered ABC May 70 call at $5. At expiration, ABC is at $82. What is the investor's loss?
- A$500
- B$700✓ Correct answer
- C$1,200
- D$1,700
Explanation
Why B — $700
The call is exercised. The uncovered writer must buy the stock at $82 and sell at $70, a $12 loss per share. The $5 premium received offsets part of the loss: $12 - $5 = $7 net loss per share, or $700. This illustrates the significant risk of writing uncovered calls — losses can grow without limit.
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