FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client purchases 100 shares of ABC stock at $60 per share and simultaneously sells 1 ABC Jan 65 Call for a premium of $3. What is the maximum profit for this covered call strategy?
- A$800
- B$500
- C$600
- D$200
Show answer & explanationAnswer & explanation
Correct answer: A. $800
The maximum profit for a covered call occurs if the stock price rises above the strike price. The profit is calculated as the strike price minus the stock purchase price, plus the premium received.
Why the other options are wrong
- B. This incorrectly subtracts the premium from the difference between the strike and purchase price.
- C. This is the difference between the strike price and purchase price multiplied by 100 shares, without adding the premium.
- D. This is the premium received multiplied by 100 shares, but does not account for the stock's appreciation.
Covered Call Maximum Profit
The maximum profit for a covered call strategy is realized when the underlying stock price rises above the call option's strike price. It's calculated as the difference between the strike price and the stock purchase price, plus the premium received.
- Strategy involves owning stock and selling a call option against it.
- Maximum profit occurs if the stock closes at or above the strike price at expiration.
- Formula: (Strike Price - Stock Purchase Price + Premium Received) x 100 shares.
Memory trick: Cover your shares, call your shot, collect the gain.