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Series 7 · Options · Calls & Puts Basics

Practice question

An investor buys 1 XYZ Jan 50 Call for a premium of $3. What is the investor's maximum loss?

A$300

B$5,000

C$4,700

DUnlimited

You selected D — Unlimited. The correct answer is A.

Why was I wrong?

Can you help me understand why the max loss is $300 and not unlimited?

Unlimited loss is for selling uncovered calls — not buying them. When you buy a call, the worst that can happen is it expires worthless.

You paid $3 premium × 100 shares = $300 max loss. That's it — you can't lose more than what you paid.

Think of it like buying a lottery ticket: you can't lose more than the ticket cost.

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