Practice Question
Which of the following statements is true regarding a call writer?
A) The call writer expects the stock to move upward.
B) The call writer expects the stock to remain the same or move down.
C) The call writer expects the stock to split.
D) The call writer expects to sell the stock prior to expiration of the option.
E) None of the above.
Answer +
Final Answer: B) The call writer expects the stock to remain the same or move down.
Explanation +
Explanation:
- Definition: A call writer is someone who sells a call option, collecting a premium in exchange for the obligation to sell the stock if the option is exercised.
- A) Incorrect. If the stock moves upward, the option is more likely to be exercised, which is not beneficial for the call writer.
- B) Correct. The call writer profits when the option expires worthless — which happens if the stock price remains the same or decreases.
- C) Incorrect. A stock split affects the number of shares/options but does not directly relate to the call writer’s expectations on price movement.
- D) Incorrect. While selling the underlying stock is a possible hedge, it’s not the core reason someone writes a call option.
- E) Incorrect. Because B is correct.
Conclusion: Option B best reflects the call writer’s expectation for neutral or bearish price movement.