SIE Exam Question 62: Answer and Explanation

Question: 62

If an investor writes a covered call and wishes to close the transaction, he needs to enter which of the following trades:

• A. Sell to close
• B. Buy to close
• C. Sell to open
• D. Both A and B

Correct Answer: D

Explanation:

If an investor has a covered call, this means that he has sold a call option to a third party and simultaneously has ownership of the underlying security for that option, e.g. selling a call option to purchase ABC stock while simultaneously owning (or buying) ABC stock. Accordingly, to close out this position, the investor would have to reverse both sides of this position, buying back the call option and selling the underlying security; this is then a combination of buying to close and selling to close.