Ratio Call Writing Risk and Exposure Analysis
An investor holding 100 shares of stock writes 2 call options against the position. What is the greatest risk of this strategy?
In a 2:1 ratio call write, 100 shares covers 1 call, leaving the 2nd call completely UNCOVERED. An uncovered call carries UNLIMITED upside loss risk.
Complete Analysis & Legal Rationale
100 shares can only cover one 100-share call contract. Writing two calls means one call is covered and one call is naked/uncovered. If the stock explodes higher, the uncovered call creates unlimited liability.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately identifies the uncovered call component that creates unlimited upside loss risk.
Downside loss is substantial (stock can drop to 0), but upside loss is unlimited.
Premiums collected only provide limited downside cushion, not a loss limit.
100 shares cannot cover 200 shares of call exposure.