Question

Your client purchases 100 shares of XYZ common stock at $50 and sells two XYZ Oct 55 calls for a premium of $2 each. This investor's maximum potential loss is

Answer 1

Answer: Unlimited

Step-by-step explanation:

The client has 100 shares in XYZ which means that the first call is covered by this stock should the price of the stock increase and the buyer exercises the option. However, the second call is not completely covered by the shares that the client owns.

This is called an uncovered call and in theory, the losses that the client could get is unlimited because the XYZ stock value could rise forever.