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

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.

Question Of The Week - Derivatives (3) - CFA Level 1

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This topic has 1 reply, 1 voice, and was last updated Jun-187:04 pm by AdaptPrep.

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- AdaptPrep
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  20 Jun 2018 at 7:51 am
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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
- AdaptPrep
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  - Undecided
  23 Jun 2018 at 7:04 pm
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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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