FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys 100 shares at $50 and writes one 3-month call contract on 100 shares with strike $55, receiving a premium of $2 per share. At expiry the share price is $60. What is the investor's total profit on the covered call position?
The profit is $700. The shares are called away at $55, giving a $5 gain per share, and the $2 premium is added, so $7 per share on 100 shares. Gains above the strike are forgone, so the $60 price does not help.
- A$700Correct
- B$500
- C$1,000
- D$300
Explanation
Stock gain is (60-50)=10 per share, but the call is exercised, so the stock is delivered at 55: stock gain capped at 5. Add premium 2: profit per share 7, total $700. The $1,000 option ignores the call payout; $500 omits the premium.
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