FRM Part I · FRM Exam Part I · Options Markets
An investor owns 1,000 shares of a stock trading at $50 and writes 10 call option contracts (100 shares each) with a strike of $55 for a premium of $2.00 per share. At expiration the stock price is $58. Ignoring transaction costs and the time value of money, what is the investor's total profit on the covered call position, per share held?
The profit is $7.00 per share. The stock gains $8, the short call loses $3 at expiry but the $2 premium offsets part of that, netting -$1. This equals the covered call maximum profit: strike minus purchase price plus premium, or 5 + 2.
- A$7.00
- B$5.00Correct
- C$10.00
- D$3.00
Explanation
Stock gain = 58 - 50 = $8. Call written loses 58 - 55 = $3, offset by premium $2, so net option result = -$1. Total = 8 - 1 = $7... recheck: the stock gain is $8 and the option net is -$1, giving $7. Maximum profit is (55-50)+2 = $7, which confirms it. The $5 option ignores the premium; $10 adds the premium without capping the stock gain; $3 counts only the call loss.
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