Covered Call Breakeven & Downside Protection Calculation
An investor purchases 200 shares of Apex Technology (APX) at $54 per share and simultaneously writes 2 APX Oct 55 Calls at a premium of $3.50. What is the investor's breakeven price per share, and what is the maximum potential profit per share?
Covered call breakeven is Stock Purchase Price minus Call Premium received ($54 - $3.50 = $50.50); maximum profit is Strike minus Purchase Price plus Premium ($55 - $54 + $3.50 = $4.50).
Complete Analysis & Legal Rationale
When establishing a covered call position (long stock + short call), the investor receives premium income that cushions downside risk by the premium collected. Breakeven = Stock Cost ($54.00) - Premium Received ($3.50) = $50.50. If the stock rises to or above the $55 strike, the call will be exercised against the investor, requiring delivery of stock purchased at $54 for $55 (a $1.00 capital gain), plus keeping the $3.50 premium, yielding a maximum profit of $4.50 per share ($900 total on 200 shares).
Mathematical Step-by-Step Derivation
- Step 1: Calculate Breakeven: Purchase Price ($54.00) - Premium Received ($3.50) = $50.50
- Step 2: Calculate Upside Cap: The stock is called away at the Strike Price ($55.00).
- Step 3: Stock Capital Gain = Strike ($55.00) - Cost ($54.00) = $1.00.
- Step 4: Maximum Profit = Stock Gain ($1.00) + Premium Received ($3.50) = $4.50 per share ($900 on 2 contracts).
- Stock Purchase Cost-$54.00
- Call Option Premium Received+$3.50
- Stock Sale at Strike on Exercise+$55.00
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 reflects the $3.50 downside cushion ($50.50 breakeven) and captures both the $1.00 stock gain and $3.50 premium ($4.50 maximum profit).
Fails to include the $1.00 appreciation in the stock price from $54 to $55, assuming max profit is only the premium received.
Finds the correct breakeven but forgets that the option premium belongs to the writer in all scenarios.
Mistakenly adds the premium to the stock purchase price ($54 + $3.50 = $57.50). In a covered call, receiving cash lowers the breakeven point.