If the price of a stock rises substantially, the investor who wrote a covered call
1. earns a modest profit
2. sustains a modest loss
3. lost an opportunity for a large profit
A)1 and 2
B)1 and 3
C)2 and 3
D)only 3

Question

Quizplus · Accepted Answer

When an investor writes a covered call, they sell someone else the right to buy the stock they own at a specific price. If the stock's price rises substantially beyond the strike price of the call option, the investor's profit is capped at the premium received plus the difference between the stock's initial price and the strike price. Therefore, they earn a modest profit but also lose the opportunity for a larger profit since they are obligated to sell the stock at the strike price, which is lower than the current market price.

If the Price of a Stock Rises Substantially, the Investor