SIE practice questionmediumOptions — Covered Call Income Strategy
Writing covered calls is MOST appropriate for an investor who:
- AExpects the stock to increase dramatically
- BWants maximum downside protection
- CWants to generate additional income from a stock position and is willing to cap their upside✓ Correct answer
- DIs very bearish on the underlying stock
Explanation
Why C — Wants to generate additional income from a stock position and is willing to cap their upside
Covered calls generate income (the premium) and are best for investors with a neutral-to-slightly-bullish outlook willing to cap upside. If the stock rises sharply (A), the shares are called away, limiting profit. The strategy provides only limited downside protection (D) — only the amount of the premium received. A bearish investor (C) would be better served by a protective put or selling the stock.
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