Series 7 practice questionhardOptions — Multiple Contracts Calculation
An investor writes 5 covered ABC Jul 50 calls at $3 each. The stock was purchased at $47. At expiration, ABC is at $55 and all calls are exercised. What is the total profit?
- A$1,500
- B$3,000✓ Correct answer
- C$4,000
- D$2,500
Explanation
Why B — $3,000
Per share: stock gain = $50 - $47 = $3, plus premium = $3, total = $6 per share. With 5 contracts: $6 x 500 shares = $3,000. Even though the stock rose to $55, the calls cap the selling price at $50. The investor misses out on $5 per share of additional gain ($55 - $50) but keeps the premium and stock appreciation to the strike.
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