FINRA FINRA Options and Derivatives 1 — Questions and Answers
Question 1: Which FINRA-related exam qualifies a registered representative to sell options to retail customers?
- Series 4
- Series 7 with options approval (Correct answer)
- Series 3
- Series 34
Correct answer: Series 7 with options approval
Passing the Series 7 (General Securities Representative) exam and receiving options approval from the firm qualifies a representative to sell options to retail customers.
Question 2: What is a 'call option' in securities trading?
- A contract giving the buyer the right to purchase a security at a specified price before expiration (Correct answer)
- A contract giving the buyer the right to sell a security at a specified price
- An obligation to buy a security at the current market price
- A directive from a broker to buy securities immediately
Correct answer: A contract giving the buyer the right to purchase a security at a specified price before expiration
A call option grants the holder the right, but not the obligation, to buy the underlying security at the strike price on or before the expiration date.
Question 3: A 'put option' gives the buyer the right to:
- Sell the underlying security at the strike price before expiration (Correct answer)
- Buy the underlying security at the strike price before expiration
- Receive dividends on the underlying security
- Force the seller to deliver securities immediately
Correct answer: Sell the underlying security at the strike price before expiration
A put option grants the holder the right, but not the obligation, to sell the underlying security at the strike price on or before the expiration date.
Question 4: What does it mean when an option is 'in the money' (ITM)?
- The option has intrinsic value — exercising it now would be profitable (Correct answer)
- The option has not yet expired
- The premium paid has been recovered
- The option's time value exceeds its premium
Correct answer: The option has intrinsic value — exercising it now would be profitable
An option is in the money when exercising it immediately would result in a profit, meaning it has intrinsic value (e.g., a call when stock price > strike price).
Question 5: What is the 'premium' of an options contract?
- The price paid by the buyer to the seller for the rights granted by the option (Correct answer)
- The strike price of the option
- The difference between the stock price and the strike price
- The margin required to write an option
Correct answer: The price paid by the buyer to the seller for the rights granted by the option
The premium is the market price of the option contract, representing what the buyer pays the seller for the rights conveyed.
Question 6: The Options Clearing Corporation (OCC) serves what function in the US options market?
- Acts as the central counterparty guaranteeing performance of all listed options contracts (Correct answer)
- Sets margin requirements for options traders
- Issues options contracts to broker-dealers
- Regulates options advertising and sales practices
Correct answer: Acts as the central counterparty guaranteeing performance of all listed options contracts
The OCC acts as issuer and guarantor for all US-listed options contracts, ensuring that obligations are fulfilled even if one party defaults.
FINRA FINRA Options and Derivatives 1
Which FINRA-related exam qualifies a registered representative to sell options to retail customers?