An investor holds 100 shares of ABC stock, currently trading at $75 per share. To generate income and slightly reduce risk, they sell 1 call option contract on ABC with a strike of $80 for a premium of $2. The stock price then rises to $82 at expiration. What is the investor's net profit/loss on this covered call strategy?

Question: An investor holds 100 shares of ABC stock, currently trading at $75 per share. To generate income and slightly reduce risk, they sell 1 call option contract on ABC with a strike of $80 for a premium of $2. The stock price then rises to $82 at expiration. What is the investor's net profit/loss on this covered call strategy?

Answer options:

• A profit of $200 ✅ A loss of $500
• A profit of $700
• A loss of $300

Correct answer: A loss of $500

Explanation: The investor makes a profit of $200 from the call premium ($2 * 100 shares). However, the shares are called away at $80, meaning they forgo the gain from $75 to $82 ($7 per share). The loss on the stock is ($82 - $75) * 100 = $700, but they only receive $80, so they lose the potential gain of $2 from $80 to $82, i.e., ($82 - $80) * 100 = $200. Combined with the stock being owned from $75 and sold at $80, they gained $500 from the stock sale ($80-$75)*100. Thus, the net loss compared to simply holding the stock would be $700 (lost potential gain) - $200 (premium received) = $500.