A portfolio manager holds 5,000 shares of ABC Corp., currently trading at $50 per share. To generate additional income and slightly reduce the effective cost basis, she decides to write 50 call options with a strike price of $52, expiring in three months, and receives a premium of $2.00 per share. What is the maximum profit she can achieve on this covered call strategy by expiration, assuming the stock price moves favorably?

Question: A portfolio manager holds 5,000 shares of ABC Corp., currently trading at $50 per share. To generate additional income and slightly reduce the effective cost basis, she decides to write 50 call options with a strike price of $52, expiring in three months, and receives a premium of $2.00 per share. What is the maximum profit she can achieve on this covered call strategy by expiration, assuming the stock price moves favorably?

Answer options: ✅ $10,000

• $20,000
• $15,000
• $30,000

Correct answer: $10,000

Explanation: The maximum profit for a covered call occurs if the stock price rises to or above the strike price. In this case, the profit from the premium received is $2.00 per share * 5,000 shares = $10,000. For the shares, if the stock goes above $52, she makes a profit of $2.00 per share ($52 - $50) * 5,000 shares = $10,000. However, this appreciation profit is capped at the strike price. Therefore, the total maximum profit is the premium received, as the stock appreciation beyond the strike is forgone when the calls are exercised. The maximum profit is the premium received, which is $2.00 * 5,000 shares = $10,000.