FINRA Series 7 / SIE Exams Series 7: Options and Derivative Strategies Syllabus

Series 7: Options and Derivative Strategies syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Series 7: Options and Derivative Strategies in FINRA Series 7 / SIE Exams, not a summary of it.

1. 1

   Options Pricing and Mechanics

   3 topics

   • Premium Components
     • Intrinsic value and time value
     • Factors affecting premium: volatility, time, and interest rates
   • Options Exercise and Assignment
     • American versus European style exercise
     • Options Clearing Corporation (OCC) and random assignment
   • Position Limits and Listing
     • Standardized contract terms and adjustments for splits/dividends
     • Position and exercise limits
2. 2

   Income and Hedging Strategies

   3 topics

   • Covered Strategies
     • Covered call writing and maximum gain/loss
     • Covered put writing
   • Protective and Hedging Strategies
     • Protective puts and protective calls
     • Married puts
   • Breakeven and Profit/Loss Analysis
     • Breakeven calculations for single options
     • Maximum gain and maximum loss determination
3. 3

   Complex Multi-Leg Strategies

   3 topics

   • Spreads
     • Vertical (bull and bear) call and put spreads
     • Debit versus credit spreads and breakeven
     • Calendar and diagonal spreads
   • Straddles and Combinations
     • Long and short straddles
     • Strangles and combinations
   • Index, Yield-Based, and Currency Options
     • Broad-based index options and cash settlement
     • Interest rate (yield-based) options
     • Foreign currency options

Series 7: Options and Derivative Strategies flashcards for FINRA Series 7 / SIE Exams

19 of 50 cards from the Series 7: Options and Derivative Strategies deck — real questions with worked answers.

1. What are the two components of an option's total premium?

   Intrinsic value plus time value. Premium = Intrinsic Value + Time Value.

2. How is intrinsic value of a call option calculated?

   Intrinsic value of a call = Market price of underlying minus the strike price (only if positive; never less than zero). A call has intrinsic value when it is in-the-money (market above strike).

3. How is intrinsic value of a put option calculated?

   Intrinsic value of a put = Strike price minus market price of underlying (only if positive; never less than zero). A put has intrinsic value when it is in-the-money (market below strike).

4. When is a call option in-the-money, at-the-money, and out-of-the-money?

   In-the-money: market price above strike. At-the-money: market price equals strike. Out-of-the-money: market price below strike.

5. When is a put option in-the-money, at-the-money, and out-of-the-money?

   In-the-money: market price below strike. At-the-money: market price equals strike. Out-of-the-money: market price above strike.

6. How do you calculate the time value of an option given its premium?

   Time value = Premium minus intrinsic value. If an option is at- or out-of-the-money, the entire premium is time value (intrinsic value = 0).

7. What happens to an option's time value as expiration approaches?

   Time value erodes (time decay/theta), accelerating as expiration nears. At expiration, time value is zero and the option is worth only its intrinsic value.

8. All else equal, how do rising interest rates and rising volatility affect option premiums?

   Higher volatility increases premiums for both calls and puts (greater chance of moving in-the-money). Higher interest rates tend to increase call premiums and decrease put premiums.

9. What is the standard contract size and total cost of one listed equity option quoted at a premium of 3?

   Each contract covers 100 shares; a premium of 3 means $3 per share x 100 = $300 total.

10. What style are listed U.S. equity options (American vs. European), and what does that mean for exercise?

    Listed equity options are American style, meaning the owner may exercise at any time prior to expiration, not just at expiration.

11. When do standard listed equity options expire?

    They expire at 11:59 PM ET on the third Friday of the expiration month; the last trading day is that Friday. (Cutoff to instruct exercise is generally 5:30 PM ET that day.)

12. What is the OCC and what role does it play in listed options?

    The Options Clearing Corporation (OCC) issues and guarantees all listed options, acts as the central counterparty, and handles the random assignment of exercise notices.

13. Describe the assignment process when an option holder exercises.

    The holder notifies their broker, who notifies the OCC. The OCC assigns the exercise to a randomly selected member firm short that option, and the firm assigns a customer (random, FIFO, or another fair method).

14. What does a customer receive in their account on the OCC's automatic exercise of an in-the-money option at expiration?

    The OCC automatically exercises options in-the-money by $0.01 or more at expiration (exercise-by-exception), unless the holder instructs otherwise.

15. When a call is exercised, what must the call writer do?

    The call writer (short call) must deliver/sell 100 shares of the underlying at the strike price to the call holder.

16. When a put is exercised, what must the put writer do?

    The put writer (short put) must buy/take delivery of 100 shares of the underlying at the strike price from the put holder.

17. What is a position limit in listed options?

    The maximum number of option contracts on the same underlying on the same side of the market that one account or group acting in concert may control, set by the OCC/exchanges to prevent manipulation.

18. For position limit purposes, which positions are on the 'same side of the market'?

    Bullish positions (long calls + short puts) are one side; bearish positions (long puts + short calls) are the other side. Limits apply to each side separately.

19. What is an exercise limit in listed options?

    The maximum number of contracts on the same underlying on the same side of the market that may be exercised within five consecutive business days; it equals the position limit.

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