FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys a share at $50 and writes a one-year call with a strike of $55 for a premium of $3. Ignoring dividends and financing costs, what is the maximum profit per share at expiration?
The maximum profit is $8 per share. If the stock finishes at or above $55, the investor gains $5 on the shares and keeps the $3 premium, and the short call caps further upside.
- A$5
- B$3
- C$8Correct
- DUnlimited
Explanation
The covered call profit is capped when the share finishes at or above the strike. Maximum profit = (55 - 50) + 3 = $8. Choosing $5 omits the premium received, and $3 counts only the premium.
Did you get it right without looking?
One question tells you little. A timed set on Trading Strategies shows your real accuracy, how long you take and where you lose marks.
More Trading Strategies questions
- A bank designs a 100-notional principal-protected note on an index starting at 100. The zero-coupon bond needed to guarantee principal costs…
- Which statement best describes the payoff profile of a protective put (long stock plus long put) compared with a covered call (long stock pl…
- A trader holds a long straddle on a stock with strike $100. Each option costs about $6, so total premium is $12. The trader believes implied…
- A trader buys one call and one put on the same stock, both with strike $50 and the same expiry. The call costs $3.20 and the put costs $2.30…
- An investor buys a 2-year principal-protected note with face value USD 10,000. The note pays the principal plus 80% of the percentage gain i…
- An investor holds a stock bought at $100 and writes a 1-year call with strike $110 for $6, and buys a put with strike $95 for $4 (a collar).…