Explanation:
This is an out-of-the-money covered call. The stock can go up $2 to the strike price, and then the writer will get $3 for the premium. Thus, the maximum profit is $5.
(Book 3, Module 40.1, LO 40.a)
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Question 49
An investor buys a stock for $40 per share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3 per share. Ignoring dividends and transaction costs, which of the following amounts represents the maximum profit the investor of this covered call can earn if the position is held to expiration?
A
$1.
B
$2.
C
$3.
D
$5.
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