SIE practice questionhardOptions — Short Call Max Loss
An investor writes (sells) an uncovered (naked) call option. What is the maximum potential loss?
- ATheoretically unlimited✓ Correct answer
- BLimited to the strike price minus the premium
- CLimited to the stock price at the time the option was written
- DLimited to the premium received
Explanation
Why A — Theoretically unlimited
A naked call writer has theoretically UNLIMITED loss potential because they may be required to sell stock at the strike price, and the stock could rise to any level. They would need to buy the stock at the higher market price to deliver it at the lower strike price. This is the riskiest options strategy. The maximum gain is limited to the premium received.
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