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A stock is available for $48, and a 3-month call on the stock at $50 is worth $3. The maximum loss on a covered call is closest to:
- $45
- $48
- $50
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The covered call involves
purchasing a stock and selling a call option. That strategy costs you $45 ($48 –
$3).The short call will offset all
gains above the strike price, $50. Above $50, the profit of the strategy is $5
($50 – $45).Below $50, the profit of the
strategy decreases as stock price decreases. The worst-case scenario is if the
company goes bankrupt, the stock becomes worthless, and you are out your
initial investment of $45.
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