Call Options
An investor is short 100 shares of XYZ at $80 and purchases a protective call with a strike price of $85 for $3. What is the maximum potential gain on this position?
Short stock + long call: max gain is capped by the premium paid for protection.
Complete Analysis & Legal Rationale
When short stock with a long call, maximum gain occurs if stock goes to zero. Maximum gain = Sale price - Call premium = $80 - $3 = $77 per share = $7,700 total. The call limits losses if the stock rises but costs $3, reducing profit potential.
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:
Matches the verified teaching point in the explanation.
Does not match the governing concept in the explanation.
Does not match the governing concept in the explanation.
Does not match the governing concept in the explanation.
Official Standard: Outline-level citation pending rule-specific upgrade. Verify against current FINRA materials.