FRM Part I · FRM Exam Part I · Properties of Options
A trader writes a European call with strike $80 for a premium of $4.50 and simultaneously buys the underlying stock at $78 (a covered call). At expiration the stock price is $90. What is the trader's total profit per share, ignoring financing costs?
The total profit is $6.50 per share. The stock gains $12, the short call costs $10 of payoff but brings in a $4.50 premium, giving a net loss of $5.50 on the call. The covered call profit is capped at strike minus cost plus premium.
- A$16.50
- B$12.00Correct
- C$6.50
- D$4.50
Explanation
Stock gain is 90 - 78 = $12. The short call loses 90 - 80 = $10 but the premium received is $4.50, so net call result is -$5.50. Total is 12 - 5.50 = $6.50. Check: maximum profit is (80 - 78) + 4.50 = $6.50. Options of $12.00 ignore the call entirely.
Did you get it right without looking?
One question tells you little. A timed set on Properties of Options shows your real accuracy, how long you take and where you lose marks.
More Properties of Options questions
- A European put has strike 40 and expires in two years. The continuously compounded risk-free rate is 6% per year. What is the highest price …
- Holding all other factors constant, which change would most clearly increase the value of a European call option on a non-dividend-paying st…
- A trader buys a European call with strike $60 for $5 and buys a European put with the same strike and expiry for $3 (a long straddle). Ignor…
- A non-dividend-paying stock trades at $50. A European call option on the stock has a strike of $45 and expires in one year. The continuously…
- A non-dividend-paying stock trades at 72. A European put on it has strike 80 and expires in six months. The continuously compounded risk-fre…
- A trader writes one European put option with a strike price of $40 and receives a premium of $2.50. At expiry the underlying trades at $34. …