SIE Understanding Products and Their Risks Question 11: Answer and Explanation

Question: 11

What is the exposure of the writer of an uncovered (naked or short) call option?

• A. Limited to the premium exchanged
• B. Limited to the strike price multiplied by the quantity of shares
• C. Negligible
• D. Unlimited

Correct Answer: D

Explanation:

D: The writer of an uncovered call option has unlimited exposure and is required to purchase the shares, no matter how high they have risen, and sell at the strike price. Choice A is the maximum potential loss of the purchaser of the option. Choice B is the amount the writer would receive at exercise. Choice C is incorrect because the loss could be quite large.