SIE Exam Question 211: Answer and Explanation

Question: 211

Which of the following statements is true regarding the maximum profit and loss that the writer of an uncovered call option may realize?

• A. The maximum profit is the premium amount.
• B. The maximum loss is the premium amount.
• C. The maximum profit is limitless.
• D. The maximum loss is the strike price times the number of shares.

Correct Answer: A

Explanation:

The maximum profit the writer of an uncovered call option may realize is the premium received in exchange for the contract. The maximum loss is limitless. Writers of an uncovered option receive income via premiums for writing and selling option contracts without actually owning the underlying security. Uncovered calls are considered the riskiest types of option because the value of the security may increase infinitely and the investor must buy it to meet the call, so the eventual market price will determine the magnitude of their loss.