Free Series 7 Advanced Options Practice Questions

Topic summary

Advanced options questions are still mechanical if you name each leg, net the premiums, identify debit or credit, and then check the customer's purpose. Do not let strategy names replace the math.

Common traps

• Calculating spread breakeven before identifying debit or credit.
• Forgetting that short options create assignment obligations.
• Confusing straddle volatility expectations with directional stock opinions.
• Choosing an options strategy that fits the math but not the customer.

Free sample questions

1. An investor buys 1 ABC 40 call at 6 and sells 1 ABC 50 call at 2. What is the breakeven? Correct answer: 44. This is a debit call spread. Net debit is 4, so breakeven is the lower strike plus net debit: 40 + 4 = 44.
2. Using a 40/50 debit call spread established for a net debit of 4, what is the maximum gain? Correct answer: $600. Maximum gain on a debit spread equals the strike difference minus the net debit. The spread is 10 points wide, so 10 - 4 = 6 points, or $600.
3. A customer sells 1 XYZ 50 put at 5 and buys 1 XYZ 45 put at 2. What is the maximum gain? Correct answer: $300. This is a credit put spread. Maximum gain is the net credit received: 5 - 2 = 3 points, or $300.
4. A customer buys a call and a put on the same stock with the same strike and expiration. What market expectation best fits this long straddle? Correct answer: Large move in either direction. A long straddle uses two purchased options and benefits from a large move either up or down. The risk is losing both premiums if the stock stays near the strike.
5. What is a major risk of a short straddle? Correct answer: Large loss if the stock moves sharply. A short straddle receives premiums but is exposed if the stock makes a large move. The short call side can create unlimited upside risk.
6. A customer owns 100 shares and writes 1 call. If assigned, what must the customer generally do? Correct answer: Sell 100 shares at the strike price. A short call writer has the obligation to sell stock at the strike price if assigned. The owned shares cover that delivery obligation.
7. A customer buys stock at 50 and buys a 50 put for 3. What is the breakeven? Correct answer: 53. For long stock plus a long put, breakeven is stock cost plus put premium. The protection costs 3, so breakeven is 53.
8. A customer owns stock, buys a protective put, and writes a covered call. What is this position commonly trying to do? Correct answer: Create a collar around the stock position. A collar combines long stock, a protective put, and a covered call. It can limit downside while also capping upside because of the short call.
9. A customer is short 1 XYZ 30 put. If assigned, what is the customer's obligation? Correct answer: Buy 100 shares at 30. A short put writer has the obligation to buy stock at the strike price if assigned. Put assignment means stock can be put to the writer.
10. A conservative income investor with limited options experience asks to write uncovered calls. What is the primary issue? Correct answer: Unlimited loss potential and poor suitability fit. Uncovered call writing can expose the customer to unlimited loss as the stock rises. Limited experience and conservative risk tolerance make suitability a major concern.