Series 7 – General Securities Representative Exam Options & Derivatives 2 — Questions and Answers
Question 1: An investor writes 1 uncovered (naked) call option. What is their maximum potential loss?
- The premium received
- The strike price minus the premium
- Unlimited (Correct answer)
- The premium multiplied by the number of contracts
Correct answer: Unlimited
The seller of a naked call faces unlimited loss because the stock price can theoretically rise without limit.
Question 2: What is a 'straddle' in options trading?
- Buying a call and selling a put at different strike prices
- Buying both a call and a put on the same stock with the same strike price and expiration (Correct answer)
- Selling a call and buying a put at the same strike
- Buying two calls at different expirations
Correct answer: Buying both a call and a put on the same stock with the same strike price and expiration
A straddle involves buying both a call and a put with identical strike prices and expiration dates, profiting from large price moves in either direction.
Question 3: What is the intrinsic value of a call option with a strike price of $45 when the stock is trading at $50?
- $0
- $5 (Correct answer)
- $45
- $50
Correct answer: $5
Intrinsic value of a call = Stock price - Strike price = $50 - $45 = $5.
Question 4: Under Series 7 rules, which document must be provided to a customer before or at the time of opening an options account?
- Regulation T notice
- Margin disclosure statement
- Options Disclosure Document (ODD) (Correct answer)
- Prospectus for each underlying security
Correct answer: Options Disclosure Document (ODD)
The Options Disclosure Document (ODD), titled 'Characteristics and Risks of Standardized Options,' must be provided before or at the time a customer's options account is approved.
Question 5: An investor buys a put option with a $60 strike price and pays a $4 premium. What is the breakeven point at expiration?
- $64
- $60
- $56 (Correct answer)
- $54
Correct answer: $56
Breakeven for a long put = Strike price - Premium = $60 - $4 = $56.
Question 6: What is time value in options pricing?
- The difference between the strike price and market price
- The portion of the option premium above its intrinsic value (Correct answer)
- The annual interest rate applied to the premium
- The number of days until the option expires
Correct answer: The portion of the option premium above its intrinsic value
Time value is the portion of the premium that exceeds intrinsic value, reflecting the probability of the option gaining value before expiration.
Series 7 – General Securities Representative Exam Options & Derivatives 2
An investor writes 1 uncovered (naked) call option.
What is their maximum potential loss?