FINRA Series 7Investment Information and Suitable RecommendationsHard
An investor buys 100 shares of DEF stock at $40 and simultaneously sells 1 DEF 45 call for a premium of $3. What is the investor's maximum potential gain per share if the stock is called away?
- A$8
- B$45
- C$3
- D$5
Show answer & explanationAnswer & explanation
Correct answer: A. $8
In a covered call, maximum gain = (strike price − purchase price) + premium received = ($45 − $40) + $3 = $8 per share, or $800 total for 100 shares if the stock is called away at $45.
Why the other options are wrong
- B. Incorrect — this is the strike price itself, not the gain.
- C. Incorrect — this is only the premium received, ignoring stock appreciation to the strike.
- D. Incorrect — this is only the capital gain on the stock, ignoring the premium.
Covered Call Maximum Gain
In a covered call strategy, maximum gain occurs if the stock is called away at the strike price, equal to (strike − purchase price) + premium received.
- Max gain = (strike price − stock cost) + premium
- Breakeven = stock cost − premium received
- Max loss = stock cost − premium (if stock goes to zero)
- Covered calls generate income but cap upside potential
Memory trick: Covered call gain = 'stock gain plus the premium paycheck.'