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Question:
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, what is the maximum profit the writer of this covered call can earn at expiration?
A
$5.
explanation
This is an out-of-the-money covered call. The net cost is $37 (40 - 3) and the maximum payoff on the position is the exercise price, $42. Thus, the maximum profit is $5
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