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

24 sample cards from the Series 7: Options and Derivative Strategies deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is the maximum loss and breakeven on a protective put?

   Max loss = (Stock cost - Strike) + Premium paid, per share. Breakeven = Stock purchase price + Premium paid.

2. What is a married put?

   A protective put established by buying the stock and the put at the same time. Tax treatment differs slightly, but the risk/reward profile matches a protective put.

3. What is a protective (long) call used with a short stock position?

   An investor short stock buys a call to hedge against the stock rising. The long call caps the loss on the short position; max loss = (Strike - short sale price) + premium.

4. How does an investor lock in a gain on appreciated long stock while staying invested?

   Buy a protective put: it sets a floor (sell price = strike) protecting unrealized gains while leaving upside open. The cost is the put premium.

5. What is the breakeven formula for a long call (buyer)?

   Breakeven = Strike price + Premium paid. The buyer profits above this point.

6. What is the breakeven formula for a long put (buyer)?

   Breakeven = Strike price - Premium paid. The buyer profits below this point.

7. For a long call buyer, what are the maximum gain and maximum loss?

   Maximum gain is unlimited (stock can rise without limit); maximum loss is the premium paid.

8. For a long put buyer, what are the maximum gain and maximum loss?

   Maximum gain = Strike price - Premium (stock can fall to zero); maximum loss is the premium paid.

9. What is a debit spread and what is the investor's outlook/profit logic?

   A debit spread is buying one option and selling another of the same class where the long option costs more (net debit paid). The investor wants the spread to widen; max gain = difference in strikes - net debit.

10. What is a credit spread and what is the investor's outlook/profit logic?

    A credit spread is selling one option and buying another of the same class where the short option brings in more (net credit received). The investor wants the spread to narrow/expire; max gain = net credit received.

11. In any vertical spread, how do you calculate the maximum loss given strikes and net premium?

    Debit spread max loss = net debit paid. Credit spread max loss = (difference in strike prices) - net credit received.

12. What is a bull call spread (debit call spread) and its construction?

    Bullish strategy: buy a lower-strike call and sell a higher-strike call (net debit). Profits as the underlying rises; gain and loss are both limited.

13. What is a bear call spread (credit call spread) and its construction?

    Bearish strategy: sell a lower-strike call and buy a higher-strike call (net credit). Max gain = credit if both expire; max loss = strike difference - credit.

14. What is a bull put spread (credit put spread) and its construction?

    Bullish strategy: sell a higher-strike put and buy a lower-strike put (net credit). Profits if the stock stays up so puts expire; max gain = credit received.

15. What is a bear put spread (debit put spread) and its construction?

    Bearish strategy: buy a higher-strike put and sell a lower-strike put (net debit). Profits as the underlying falls; gain and loss both limited.

16. How do you find the breakeven of a call spread (bull or bear)?

    Breakeven = Lower strike + net premium (the 'Call-Up' rule: for calls, add net premium to the lower strike).

17. How do you find the breakeven of a put spread (bull or bear)?

    Breakeven = Higher strike - net premium (the 'Put-Down' rule: for puts, subtract net premium from the higher strike).

18. What is a long straddle and the investor's expectation?

    Buying a call and a put with the same strike and expiration on the same underlying. The investor expects high volatility (a large move in either direction). Max loss = total premiums paid.

19. What are the two breakeven points of a long straddle?

    Upside breakeven = Strike + total premiums; Downside breakeven = Strike - total premiums. The stock must move beyond one of these to profit.

20. What is a short straddle and its risk profile?

    Selling a call and a put with the same strike and expiration. The investor expects little movement; max gain = total premiums received, but loss is unlimited (on the call side) / very large.

21. How does a combination (combo) differ from a straddle?

    A combination uses a call and a put on the same underlying but with different strikes and/or different expirations, whereas a straddle uses the same strike and expiration. A long strangle (OTM call + OTM put) is a common combination.

22. How are most index options settled, and what is the settlement style?

    Broad-based index options settle in cash (no delivery of securities) for the in-the-money amount, and are typically European style (exercised only at expiration).

23. How do yield-based (interest-rate) options work, and what moves their value?

    Yield-based options are cash-settled options based on Treasury yields. Their value rises with interest rates, so call buyers profit when yields rise and put buyers profit when yields fall.

24. How do foreign currency options help a U.S. importer hedge, and how do they settle?

    A U.S. importer who must pay in foreign currency buys foreign currency calls to hedge against the foreign currency strengthening (the dollar weakening). Listed FX options are cash-settled.

What this deck covers

Series 7: Options and Derivative Strategies flashcards FAQ