Assume you purchase one share of a stock and sell a call option on a single share of that same stock with an exercise price of $25.What is the maximum payoff you can realize on this combination?
A)The exercise price of $25
B)An amount equal to the stock price on the option expiration date
C)An amount equal to $25 minus the stock price on the option expiration date
D)An amount equal to the stock price on the expiration date plus $25
E)Zero

Question

Quizplus · Accepted Answer

The maximum payoff you can realize from this combination, known as a covered call, is the exercise price of the call option ($25) because if the stock price exceeds $25, the call option will be exercised, capping your gains at $25.

Assume You Purchase One Share of a Stock and Sell