CFA Practice Question

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CFA Practice Question

A put on stock X with a strike price of $40 is priced at $2.00 per share, while a call with a strike price of $40 is priced at $3.50. What is the maximum per share loss to the writer of the uncovered put and the maximum per share gain to the writer of the uncovered call?

Maximum Loss to Put Writer : Maximum Gain to Call Writer
A. $38.00 : $3.50
B. $38.00 : $36.50
C. $40.00 : $3.50

User Contributed Comments 5

User Comment
amitchau Can anyone provide the explanation for the Maximum loss to put writer
semhx loss to put writer is equal to the option intrinsic value at the time of expiration minus premium received.

hence put writer loss = (X-S)- p

in worst case scenario S=0 ---> 40-2=38
poomie83 you would not exercise the put when it is out of money. the maximum loss only applies when exercised
zhuangwen can anyone explain the max gain to call writer?
jvorbaneja As you are writing (selling) the call, your maximum gain is only the premium collected when selling the derivative. Therefore, the maximum gain to call writer is the premium of the option, $3.50
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