SIE Options and Derivatives 1

Question 1

A call option gives the holder the right to:

Accepted Answer

Buy shares at the strike price

Answer

A call option grants the holder the right, but not the obligation, to buy the underlying security at the strike price before expiration.

Question 2

A put option gives the holder the right to:

Accepted Answer

Sell shares at the strike price

Answer

A put option grants the holder the right to sell the underlying security at the strike price before expiration.

Question 3

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

Accepted Answer

The premium paid for the option

Answer

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

Question 4

An option is 'in the money' (ITM) when:

Accepted Answer

Exercising the option would produce a positive intrinsic value

Answer

An option is in the money when exercising it would produce positive intrinsic value, regardless of the premium paid.

Question 5

What does it mean to write (sell) a covered call?

Accepted Answer

Selling a call option while owning the underlying shares

Answer

A covered call involves selling a call option while owning the underlying shares, providing income in exchange for capping upside.

SIE - Securities Industry Essentials Practice Test