FRM Part I · FRM Exam Part I · Options Markets
An investor owns 100 shares of a stock trading at $50 and writes one call option contract on 100 shares with a strike of $55, receiving a premium of $2 per share. Ignoring transaction costs and dividends, what is the investor's maximum profit per share at expiration (relative to the initial stock price of $50)?
The maximum profit is $7 per share. The covered call caps stock gains at the strike, giving $5 of appreciation from 50 to 55, plus the $2 premium received. The profit is reached whenever the stock finishes at or above $55 at expiration.
- A$2
- B$5
- C$7Correct
- DUnlimited
Explanation
A covered call profit is capped at the strike. Maximum gain = (55 - 50) + 2 = $7 per share, achieved when the stock finishes at or above $55. $5 omits the premium; $2 ignores the stock appreciation up to the strike.
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