Question

Selling options on stock you already own

A) is illegal under federal law.
B) cannot benefit you financially.
C) is called a covered call strategy.
D) is not a very good idea

Answer 1

Selling options on stock you own is known as a 'covered call strategy', which is legal and can be financially beneficial by generating income through premiums.

Step-by-step explanation:

The correct answer to the student's question is C) covered call strategy. This is a financial strategy where an investor sells call options on stocks they already own. It is a way to generate additional income from the investment through the premiums received from selling the call options.

This practice is legal and can be beneficial financially; it is not inherently risky like the practice of 'buying on margin', which involves borrowing money to buy stocks. However, the covered call strategy does cap the upside potential if the stock's price rises above the strike price of the call option sold.