Products & Their RisksQuestion 92 of 398
An investor owns 100 shares of a stock and sells one call option against those shares. This strategy is:
a.A protective put
b.A naked call
c.A long straddle
d.A covered call, used to generate income and modestly hedge
Explanation
Writing a call against stock already owned is a covered call. The investor collects the premium as income and gains slight downside cushion, but caps upside gains at the strike price because the shares may be called away. It is a common income strategy in a neutral to mildly bullish outlook.
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Related questions on this topic
- A put option with a strike price of $40 is held while the underlying stock trades at $45. This put is:
- When the market price of the underlying stock exactly equals the strike price, both a call and a put on that stock are said to be:
- An option premium is composed of:
- An investor holds a long stock position and buys a put on that stock to limit downside risk. This is known as:
- What is the maximum loss for the buyer of a call option?
- What is the maximum gain for the writer of a put option?
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