SIE practice questionmediumOptions — Covered Call
An investor owns 100 shares of ABC stock at $50 and writes 1 ABC 55 call for $3. What is the maximum gain on the combined position?
- A$300
- BUnlimited
- C$800✓ Correct answer
- D$500
Explanation
Why C — $800
Maximum gain = (strike price - stock purchase price) + premium received = ($55 - $50) + $3 = $8 per share = $800. If ABC rises above $55, the stock is called away at $55 (gaining $5/share) plus the $3 premium collected. The covered call caps upside but generates income. This is a conservative strategy used to enhance returns on an existing stock position.
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