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 be more volatile.
D) The call writer expects to sell the stock prior to expiration of the option.
E) The call writer can offset his potential loss by buying and holding a put option.
Answer +
Final Answer: B) The call writer expects the stock to remain the same or move down.
Explanation +
Explanation:
- A) Incorrect. A call writer does not want the stock to go up — that benefits the buyer of the option, not the seller.
- B) Correct. The call writer earns the premium and benefits when the stock remains flat or decreases, making the option unlikely to be exercised.
- C) Incorrect. Increased volatility increases the chance of upward movement, which is risky for a call writer.
- D) Incorrect. This is irrelevant — the call writer’s expectation is based on price movement, not on plans to sell the stock.
- E) Incorrect. That would describe a hedging strategy (a protective put), not a pure call writing position.
Conclusion: Statement B best reflects the expectation of a call writer: neutral to bearish market movement.