Options — Series 7 FINRA practice questions

A 70-year-old retiree on a fixed pension wants stable income. MOST suitable choice:

1. Investment-grade income bonds
2. Speculative growth equities
3. Uncovered short call options
4. Speculative penny-stock issues

Answer: A — Investment-grade income bonds

A) Correct — steady income with capital preservation. B) Too volatile for a retiree. C) Unlimited upside risk; unsuitable. D) Speculative and illiquid; unsuitable.

The maximum loss for a naked call writer is:

1. The premium collected up front
2. Strike price minus premium received
3. Theoretically unlimited as stock rises
4. The strike price times 100 shares

Answer: C — Theoretically unlimited as stock rises

A) That is max gain, not loss. B) That describes a naked put writer's max loss. C) Correct — the underlying can theoretically rise without bound. D) The strike alone isn't the ceiling.

An at-the-money call option will generally have a delta CLOSEST to:

1. 0.00
2. 0.25
3. 0.50
4. 1.00

Answer: C — 0.50

C) Correct — at-the-money options typically show a delta near 0.50. A) Delta near zero describes a deep out-of-the-money option. B) 0.25 suggests an option well out-of-the-money, not at-the-money. D) Delta near 1.00 describes a deep in-the-money option.

The delta of an at-the-money call option is approximately:

1. 0.50 (equally likely up or down at ATM strike)
2. 0.10 (deep out-of-the-money delta at ATM)
3. 0.90 (deep in-the-money delta at ATM strike)
4. 1.00 (fully hedged position delta at ATM)

Answer: A — 0.50 (equally likely up or down at ATM strike)

A) Correct — ATM call delta is about 0.50; move to 1.0 as ITM, 0 as OTM. B) That's a deep OTM delta. C) That's a deep ITM delta. D) Deep ITM approaches 1.0 but doesn't reach it before expiration.

A bear put spread is constructed by:

1. Buying a higher-strike put and selling a lower-strike put
2. Selling a higher-strike put and buying a lower-strike put
3. Buying a call and buying a put at the same strike
4. Selling a call and selling a put at the same strike

Answer: A — Buying a higher-strike put and selling a lower-strike put

A) Correct — a debit bear put spread buys the higher strike put. B) That is a bull put credit spread. C) That is a long straddle. D) That is a short straddle.

A market maker earns compensation primarily from the:

1. Commission on each trade
2. Underwriting concession share
3. Bid-ask spread capture
4. Advisory fee retention

Answer: C — Bid-ask spread capture

A) Commissions are agency comp. B) Concessions are underwriter income. C) Correct — spread is the MM's profit. D) Advisory fees are IA income.

The Options Disclosure Document (ODD) must be delivered to a customer:

1. Only if the customer specifically requests it
2. Annually while the account remains open
3. At or before options account approval
4. Only after the first options trade settles

Answer: C — At or before options account approval

A) Delivery is mandatory, not on request. B) Not the primary trigger; initial delivery is at approval. C) Correct — ODD must be provided at or before approval to trade options. D) Must be delivered before, not after, trading.

An open-end fund's shares are priced daily at:

1. Net asset value price
2. Bid-ask spread midpoint
3. Auction discovery price
4. Last-sale market price

Answer: A — Net asset value price

A) Correct — NAV plus any sales charge. B) Bid-ask is a market-quote concept. C) No auction for open-ends. D) Open-end shares are not tape-traded.

The intrinsic value of a call option equals the:

1. Strike price minus the current stock price
2. Premium paid to buy the call option
3. Greater of zero or (stock minus strike)
4. Greater of zero or (strike minus stock)

Answer: C — Greater of zero or (stock minus strike)

A) Reverses the direction and ignores the floor at zero. B) Premium equals intrinsic plus time value. C) Correct — a call's intrinsic value is max(0, stock - strike). D) That formula is a put's intrinsic value.

When a call option is exercised by the buyer, for the writer the premium received:

1. Combines with the stock transaction for tax reporting
2. Is separately taxed as short-term capital gain
3. Is treated as ordinary dividend income to writer
4. Is exempt from all federal income tax reporting

Answer: A — Combines with the stock transaction for tax reporting

A) Correct — premium is absorbed into the sale proceeds of the stock. B) Not separate — it merges with stock basis or proceeds. C) Options premium is not dividend income. D) Premium is taxable.

What is a qualified covered call?

A covered call with enough time to expiration and a strike price not deeply in-the-money, structured so the stock's existing holding period is NOT suspended for capital-gains purposes.

A customer wants to protect a large stock position from a market downturn. Best strategy?

Buy protective puts — provides downside protection (insurance) while maintaining upside potential. The premium is the cost of protection.

What is a put option?

A contract giving the buyer the right to sell 100 shares at a specified strike price before/on expiration.

Max gain for a covered call writer?

Premium + (Strike − Stock Purchase Price). Stock called away if it rises above strike.