Free Series 7 Options Practice Questions

Topic summary

Options questions usually combine position type, premium flow, breakeven math, and customer purpose. Start by naming the position, then calculate max gain, max loss, and breakeven before reading the answer choices.

Common traps

• Reversing long and short premium treatment.
• Using put breakeven math on a call, or call math on a put.
• Ignoring whether a spread is debit or credit.
• Choosing an options strategy that solves the math but fails suitability.

Free sample questions

1. An investor buys 1 ABC 40 call at 3. What is the breakeven at expiration? Correct answer: 43. A long call breaks even at strike price plus premium paid. The breakeven is 40 + 3 = 43.
2. A customer buys 1 XYZ 55 put at 4. What is the breakeven at expiration? Correct answer: 51. A long put breaks even at strike price minus premium paid. The breakeven is 55 - 4 = 51.
3. A customer owns 100 shares of DEF and sells 1 DEF call. What is the most likely objective? Correct answer: Generate income on a stock position. A covered call generates premium income, but it limits upside because the stock can be called away if assigned.
4. A customer owns 100 shares of GHI and buys 1 GHI put. What is the put primarily doing? Correct answer: Protecting the stock position from downside. A protective put works like insurance on a long stock position. It creates a floor, but the premium is the cost of that protection.
5. What is the maximum loss for an uncovered short call? Correct answer: Unlimited. An uncovered short call has unlimited loss because the stock can keep rising and the seller may have to buy shares at the market price for delivery.
6. A customer sells 1 JKL 30 put at 2. What is the maximum loss before commissions? Correct answer: $2,800. A short put maximum loss is strike price minus premium, times 100 shares. (30 - 2) x 100 = $2,800.
7. A customer buys one call for 6 and sells another call with the same expiration for 2. What type of spread is this? Correct answer: Debit spread. The customer pays more premium than they receive, so the spread is opened for a net debit of 4.
8. A long straddle is generally most suitable when the investor expects what? Correct answer: A large move in either direction. A long straddle buys a call and a put at the same strike and expiration. It benefits from a large move either up or down.
9. Which customer profile is usually least appropriate for uncovered option writing? Correct answer: Retired investor needing capital preservation. Uncovered writing can create substantial or unlimited risk. It is usually inconsistent with capital preservation and low risk tolerance.
10. An equity option contract normally represents how many shares of the underlying stock? Correct answer: 100. Standard listed equity option contracts generally cover 100 shares, unless an adjustment changes the contract terms.