Series 7 practice questionmediumOptions — Uncovered Put Writing
What is the maximum loss for a writer of an uncovered put option with a strike price of $60 and a premium of $4?
- A$400
- BUnlimited
- C$6,000
- D$5,600✓ Correct answer
Explanation
Why D — $5,600
The maximum loss for an uncovered put writer occurs if the stock drops to zero. The writer would be obligated to buy the stock at the $60 strike price. Loss = strike price - premium received = $60 - $4 = $56 per share, or $5,600 per contract. Unlike naked calls, the loss is not unlimited because the stock cannot fall below zero.
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