Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

CFA Events Calendar

View full calendar

CFA Events Calendar

View full calendar

This Month's Leaders

Recommended Discussions

See how our partners can help you ace your CFA exams.

Question of the Week - Derivatives

AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
edited September 2015 in Level 1 Questions
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:

Question of the Week - Derivatives 19 votes

$45
73%
ZeeAdaptPreprsparksYeshank71hamiltonsamin20ajnoakeskevtivpaulopitaclangerhAlaricLynMrTsotnesuls 14 votes
$48
0%
$50
26%
CFAI_wont_stop_meArsenalFanprem1619Richie321mukta 5 votes

Comments

  • AdaptPrepAdaptPrep Des Moines, IA, USAPosts: 211 Sr Associate
    $45

    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.

Sign In or Register to comment.