Covered Call

A customer neutral on a stock they own who wants extra income can:

1. A.Buy a protective putBuying a put costs premium rather than producing it, so it cannot answer a question about generating income. It protects the downside — the opposite side of the trade from what the stem asks for.
2. B.Short the stockA short sale against the shares held cancels the exposure without producing any premium. The customer wants to keep the stock and be paid for the wait, which requires selling something to another party.
3. C.Write a covered callCorrect - income from premium in a flat market.
4. D.Buy a straddleA straddle costs two premiums and needs a dramatic move in either direction to earn them back. A stock that stays flat is the scenario in which both legs expire worthless.

Why: Writing a covered call collects premium income and suits a neutral outlook.

Nadia Petrov wants extra income from her 500-share position in Halloran Steel and is willing to part with the shares at $45. A covered call writer:

1. A.Buys a put for protectionThat is the protective put, a different strategy built from long stock plus a long put. The covered call writer sells an option and collects premium rather than paying it, and the direction of the cash flow alone separates the two.
2. B.Owns the stock and sells a call against itCorrect - covered means the stock backs the call.
3. C.Is short the stock and sells a callPairing a short stock position with a short call leaves the call uncovered, because a rally damages both legs at the same time. Coverage requires the ability to deliver shares on assignment, and only a long stock position provides that.
4. D.Owns no stock (naked)This is the definition of the uncovered or naked writer, the precise position that the word covered exists to distinguish from. With no shares to deliver on assignment, the potential loss is theoretically unlimited.

Why: A covered call writer owns the underlying stock and sells a call against it, collecting premium and accepting the obligation to sell if assigned.

A customer expecting a stock to trade sideways who wants extra income can:

1. A.Buy a straddleA long straddle pays two premiums and needs a large move in either direction to pay off. A sideways stock is the worst outcome for it, and buying options spends cash rather than producing income.
2. B.Buy a putBuying a put is a cash outflow, not income, and it profits only if the stock falls. The stem describes a sideways market and a desire for income, which points the other way.
3. C.Sell a covered callCorrect - income in a flat market.
4. D.Short the stockShorting is a bearish bet that pays nothing if the stock goes nowhere, and the short seller owes any dividends rather than collecting income. It also carries theoretically unlimited upside risk, the opposite of a conservative income overlay.

Why: Selling a covered call generates premium income and suits a neutral-to-slightly-bullish view.

An investor owns 100 shares purchased at 40 and sells one covered call with a 45 strike, collecting a premium of 2. What best describes this strategy?

1. A.Income now, with upside capped at the strikeCorrect — the writer keeps the 2 premium but must sell at 45 if the stock rises above it.
2. B.A bearish bet that profits most if the stock collapsesA covered call writer is neutral-to-mildly-bullish and still owns the shares, so a collapse hurts.
3. C.Unlimited profit potentialUpside is capped at the 45 strike — the shares get called away above it.
4. D.Full downside protection against any declineThe premium cushions only slightly; a large drop still produces losses on the stock.

Why: A covered call generates premium income and a small cushion against a decline, but caps the upside: if the stock rises above 45, the shares are called away at 45. The gain is capped at the appreciation to 45 plus the premium.