A client purchases 100 shares of XYZ stock at $60 per share and simultaneously sells 1 XYZ 50 Put for a premium of $5. What is the maximum loss potential for this covered put strategy?

Correct answer: D. $5,500

A covered put (long stock, short put) is often misidentified. Here, the investor owns the stock. If the stock price falls to zero, the loss on the stock is the purchase price. The short put expires worthless if the stock stays above the strike, but if the stock falls below the strike, the investor may be forced to buy more shares, or the value of the short put profit would reduce the overall loss. This is essentially a long stock position with a short put. The maximum loss is the stock purchase price minus the premium received if the stock goes to zero, as the put would expire worthless in that scenario. However, the question describes a 'covered put' which implies the put is covered by cash or a short position. When you own the stock and sell a put, it's typically called a 'protective put' or sometimes a 'covered put' if the put is in-the-money. A long stock, short put strategy is usually bullish. The maximum loss occurs if the stock price falls to zero. The short put would expire worthless, and the investor loses the stock purchase price, offset by the premium received.