Stock Broker Options Trading & Strategies 2

Question 1

A covered call strategy involves:

Accepted Answer

Selling a call option while owning the underlying stock

Answer

A covered call is when an investor who owns the underlying stock sells a call option against that position to generate additional premium income.

Question 2

What is the maximum profit for an investor who writes a covered call?

Accepted Answer

The premium received plus any stock gains up to the strike price

Answer

The covered call writer's maximum profit equals the premium received plus any stock price appreciation from the purchase price up to the strike price.

Question 3

A protective put strategy is primarily used to:

Accepted Answer

Hedge against a drop in value of a stock you already own

Answer

A protective put (buying a put on stock you own) establishes a floor price, limiting downside risk while preserving upside potential.

Question 4

What does 'out of the money' mean for a put option?

Accepted Answer

The current stock price is above the strike price

Answer

A put option is out of the money when the stock price is above the strike price, meaning exercising the put would be unprofitable and the option has no intrinsic value.

Question 5

An investor writes an uncovered (naked) call. What is their maximum potential loss?

Accepted Answer

Theoretically unlimited, as the stock price can rise indefinitely

Answer

A naked call writer faces theoretically unlimited loss because there is no ceiling on how high the stock price can rise, yet they must deliver shares at the fixed strike price.

Stock Broker Practice Test

Stock Broker Practice Test

Stock Broker Options Trading & Strategies 2