FINRA FINRA Options and Derivatives 2

Question 1

What is a 'covered call' strategy?

Accepted Answer

Selling a call option while owning the underlying stock

Answer

A covered call involves selling (writing) a call option on a stock the investor already owns, generating premium income in exchange for capping upside potential.

Question 2

What is a 'protective put' strategy?

Accepted Answer

Buying a put option on stock already owned to limit downside risk

Answer

A protective put involves buying a put on stock you own, functioning like insurance that limits losses if the stock price declines below the strike price.

Question 3

Which of the following best describes an options 'straddle'?

Accepted Answer

Simultaneously buying a call and a put with the same strike price and expiration

Answer

A long straddle involves purchasing both a call and a put with identical strike prices and expiration dates, profiting from significant price movement in either direction.

Question 4

What does 'time decay' (theta) mean in options pricing?

Accepted Answer

The erosion of an option's time value as expiration approaches

Answer

Theta represents the rate at which an option loses time value as it approaches expiration, with decay accelerating in the final weeks before expiry.

Question 5

FINRA Rule 2360 governs transactions in which type of securities?

Accepted Answer

Options

Answer

FINRA Rule 2360 (Options) establishes conduct standards, account requirements, approval procedures, and supervisory obligations for options transactions.

(FINRA) FINRA Exams Practice Test

(FINRA) FINRA Exams Practice Test

FINRA FINRA Options and Derivatives 2