Series 7 – General Securities Representative Exam Options & Derivatives

Question 1

A call option gives the buyer the right to:

Accepted Answer

Buy 100 shares at the strike price before expiration

Answer

A call option grants the holder the right, but not the obligation, to purchase 100 shares at the specified strike price before expiration.

Question 2

An investor buys 1 XYZ call option with a $50 strike price, paying a $3 premium. At expiration, XYZ is trading at $55. What is the investor's profit?

Accepted Answer

$200

Answer

Profit = (Stock price - Strike price - Premium) × 100 = ($55 - $50 - $3) × 100 = $200.

Question 3

What is the maximum loss for the buyer of a put option?

Accepted Answer

The premium paid

Answer

The maximum loss for an option buyer is limited to the premium paid, since the option simply expires worthless.

Question 4

Which options strategy involves selling a call option on stock already owned?

Accepted Answer

Covered call

Answer

A covered call involves writing (selling) a call option on shares already held, generating premium income while capping upside potential.

Question 5

What does 'in-the-money' mean for a put option?

Accepted Answer

The stock price is below the strike price

Answer

A put option is in-the-money when the underlying stock price is below the strike price, giving it intrinsic value.

Series 7 – General Securities Representative Exam Practice Test