Assume You Purchase One Share of a Stock and Sell

question 11

Multiple Choice

Assume you purchase one share of a stock and sell a call option on a single share of that same stock with an exercise price of $25.What is the maximum payoff you can realize on this combination?

• A)The exercise price of $25
• B)An amount equal to the stock price on the option expiration date
• C)An amount equal to $25 minus the stock price on the option expiration date
• D)An amount equal to the stock price on the expiration date plus $25
• E)Zero

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Definitions:

Purchase Price

The amount of money paid to acquire a good, service, or asset.

Stock Split

An action by a company to divide its existing shares into multiple shares to boost the liquidity of the shares, although not affecting the company's overall market capitalization.

Retained Earnings

The portion of a company's profits not distributed as dividends to its shareholders but kept in the company to reinvest in its core business or to pay debt.

Equity Section

The portion of a company's balance sheet that represents the owners' claims to the assets after all liabilities have been deducted.