Which of the following do experts consider less risky than a covered call?
A Buying long calls.
B Buying stock.
C Selling naked calls.
D Buying U.S. Treasury bills.
The correct answer and explanation is:
Correct Answer: D. Buying U.S. Treasury bills
Buying U.S. Treasury bills is considered less risky than a covered call by most financial experts. Treasury bills (T-bills) are short-term government securities backed by the full faith and credit of the United States government. They are widely seen as one of the safest investments because they carry virtually no risk of default. The U.S. government has never defaulted on its debt obligations, making T-bills a secure choice for conservative investors.
In contrast, a covered call involves owning a stock and simultaneously selling a call option on that stock. While it is generally regarded as a conservative options strategy, it still carries more risk than T-bills. The main risk lies in the underlying stock. If the stock price drops significantly, the investor may incur losses, even though they collected a premium from selling the call. Additionally, if the stock price rises sharply, the investor sacrifices potential gains because the stock may be called away at the strike price.
Buying long calls (choice A) is riskier than a covered call because the entire premium paid for the call option could be lost if the stock fails to rise above the strike price before expiration. Buying stock (choice B) carries market risk, especially during downturns. Selling naked calls (choice C) is considered one of the riskiest strategies in options trading, as it exposes the seller to unlimited losses if the stock price rises sharply.
Therefore, among all the listed options, buying U.S. Treasury bills is the least risky investment. It offers safety of principal and predictable returns, although with lower potential gains. It is often used by investors seeking capital preservation rather than aggressive growth or income through options strategies.