FINRA Series 7 quiz

An investor goes long 100 shares of MU stock at $46 and short 1 MU Mar $50 call @ $2.50. What is the investor’s maximum loss?

When an investor sells calls against long stock, they create a covered call (an income strategy). These strategies are best in a flat market, as the option premium creates additional income for the investor. If the market price falls, the shares lose value and the call expires worthless. The worst case scenario occurs if the market price falls to $0. The shares lose $4,600 overall ($46 per share x 100 shares), but the call expires worthless and the premium reduces the loss on the shares. Therefore, the maximum loss is $4,350 ($4,600 loss - $250 premium).