NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
Which of the following statements about the writer (seller) of a call option is correct?
The maximum profit of a call option writer is limited to the premium received. The writer keeps it if the option expires worthless, while losses can be unlimited if the underlying rises, which is why writers must deposit margin upfront.
- AMaximum loss is limited to the premium received
- BMaximum profit is limited to the premium receivedCorrect
- CMaximum profit is unlimited if the price rises
- DThe writer pays margin only if the option is exercised
Explanation
The call writer receives the premium and gains at most that amount, which occurs when the option expires unexercised. Losses are potentially unlimited as the price rises. Writers are required to pay margin upfront, not only on exercise.
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