Canadian Securities Course (CSC) Level 1 Practice Exam

Who would write call options?

1. People who have sold the underlying stock

2. People who have no opinion on the stock price

3. People who own the underlying stock (Covered calls)

4. People who do not own the underlying stock

The correct answer is: People who own the underlying stock (Covered calls)

People who own the underlying stock write call options, also known as covered calls. Writing a covered call involves selling a call option on a stock that the investor already owns. By doing so, the investor collects a premium from the sale of the call option. If the stock price does not reach the strike price of the call option by the expiration date, the investor keeps the premium as profit. This strategy can provide additional income to investors who are already holding the underlying stock and are willing to sell it at a specified price in the future. Option A is incorrect because people who have sold the underlying stock are not the ones who write call options. Option B is incorrect as it describes individuals with no opinion on the stock price, which is not typically a motivation for writing call options. Option D is incorrect as people who do not own the underlying stock would not be able to write covered calls since they do not possess the stock needed to cover the options.