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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:
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Question of the Week - Derivatives 18 votes

$45
72%
ZeeAdaptPreprsparksYeshank71hamiltonsamin20ajnoakeskevtivpaulopitaclangerhAlaricLynMrTsotne 13 votes
$48
0%
$50
27%
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.

    PassedTense
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    Level II: Adapt Exam Engine + Video Lessons
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