Series 7 – General Securities Representative Exam Options & Derivatives 1 — Questions and Answers
Question 1: A call option gives the buyer the right to:
- Sell 100 shares at the strike price before expiration
- Buy 100 shares at the strike price before expiration (Correct answer)
- Receive dividends on 100 shares
- Short 100 shares at the market price
Correct answer: Buy 100 shares at the strike price before expiration
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?
- $500
- $200 (Correct answer)
- $300
- $550
Correct answer: $200
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?
- Unlimited
- The strike price minus the premium
- The premium paid (Correct answer)
- The difference between strike price and market price
Correct answer: The premium paid
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?
- Long straddle
- Covered call (Correct answer)
- Protective put
- Bull call spread
Correct answer: Covered call
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?
- The stock price equals the strike price
- The stock price is above the strike price
- The stock price is below the strike price (Correct answer)
- The option has not yet been exercised
Correct answer: The stock price is below the strike price
A put option is in-the-money when the underlying stock price is below the strike price, giving it intrinsic value.
Question 6: What is the Options Clearing Corporation (OCC) primarily responsible for?
- Setting options premium prices
- Acting as the guarantor and central clearinghouse for all listed options contracts (Correct answer)
- Regulating options advertising and marketing
- Approving new options strategies for retail investors
Correct answer: Acting as the guarantor and central clearinghouse for all listed options contracts
The OCC acts as the central counterparty and guarantor for all listed options trades, ensuring contract performance.
Series 7 – General Securities Representative Exam Options & Derivatives 1
A call option gives the buyer the right to: