SIE Understanding Products and Their Risks Question 47: Answer and Explanation

Question: 47

Which of the following is a disadvantage of writing a naked stock call option?

• A. The strike price is not stated when the option is sold to the buyer.
• B. The writer of a naked stock call option has an unlimited risk.
• C. The expiration date is not stated when sold to the buyer.
• D. The buyer of the option may choose which company's stock to buy.

Correct Answer: B

Explanation:

B: Choice B is correct because the writer of a naked stock call option does not own the stock but promises to sell the stock at a certain price on or before a given date. If the stock goes up, the writer is obligated to purchase the stock at a loss in order to fulfill or cover the option, no matter how high the share price has risen. Choice A is incorrect because the strike price is stated when the option is sold to the buyer. Choice C is incorrect because the expiration is stated when the option is sold to the buyer. Choice D is incorrect because the option states the specific stock to buy.