Multiple Option Strategies (Spreads, Straddles) – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🔀 Multiple Option Strategies (Spreads, Straddles) – Series 7 Exam
The Series 7 Exam expects candidates not only to understand basic options but also to master multiple-option strategies like spreads and straddles. These strategies involve combining two or more options to manage risk, generate income, or profit from specific market conditions.
Here’s your full review of the key multiple-option strategies you need to know to pass the Series 7.
📘 What Are Multiple-Option Strategies?
- Spread: Involves buying one option and selling another option of the same type (calls or puts) on the same underlying asset.
- Straddle: Involves buying (or selling) a call and a put on the same underlying asset with the same strike price and expiration.
- ✅ Strategies are designed to limit risk and limit reward (compared to single-option positions).
🧩 Spreads
1. Types of Spreads
| Spread Type | Structure | Market Outlook |
|---|---|---|
| Vertical Spread | Same expiration, different strike prices | Bullish or Bearish |
| Horizontal (Calendar) Spread | Same strike price, different expirations | Time-based strategy |
| Diagonal Spread | Different strike prices and different expirations | Mixed outlook |
2. Call Spreads vs. Put Spreads
| Type | Bought Option | Sold Option | Net Result | Bias |
|---|---|---|---|---|
| Bull Call Spread | Lower strike | Higher strike | Net debit | Moderately bullish |
| Bear Call Spread | Higher strike | Lower strike | Net credit | Moderately bearish |
| Bear Put Spread | Higher strike | Lower strike | Net debit | Moderately bearish |
| Bull Put Spread | Lower strike | Higher strike | Net credit | Moderately bullish |
3. Max Gain, Max Loss, and Breakeven Formulas
- Debit Spread:
- Max Gain = Difference between strikes – Net premium paid
- Max Loss = Net premium paid
- Credit Spread:
- Max Gain = Net premium received
- Max Loss = Difference between strikes – Net premium received
🎯 Straddles
1. Types of Straddles
| Type | Structure | Market Outlook |
|---|---|---|
| Long Straddle | Buy 1 call + Buy 1 put (same strike, same expiration) | Expect high volatility |
| Short Straddle | Sell 1 call + Sell 1 put (same strike, same expiration) | Expect low volatility |
2. Long Straddle Characteristics
- High volatility play
- Profit if the stock makes a big move up or down
- Max Loss = Total premiums paid
- Max Gain = Unlimited on upside (call), substantial on downside (put)
3. Short Straddle Characteristics
- Low volatility play
- Profit if the stock remains stable
- Max Gain = Total premiums received
- Max Loss = Unlimited on upside (call side)
📝 Example Questions
Question 1:
An investor establishes a bull call spread by buying 1 XYZ 40 Call at 5 and selling 1 XYZ 45 Call at 2. What is the maximum profit?
✅ Answer:
- Net debit = 5 – 2 = 3
- Difference between strikes = 5
- Max Gain = 5 – 3 = 2 points, or $200
Question 2:
An investor buys 1 ABC 50 Call at 4 and buys 1 ABC 50 Put at 5. What is the breakeven on the upside?
✅ Answer:
- Total premium = 4 + 5 = 9
- Breakeven (Call Side) = Strike + Total Premium = 50 + 9 = 59
📊 Key Series 7 Focus Points for Multiple Option Strategies
- 🧠 Know how to determine bullish vs bearish bias in spreads
- 📄 Memorize max gain, max loss, breakeven formulas for each type
- ⚡ Recognize when to use straddles (high or low volatility expectations)
- 📋 Understand assignment risk, especially in credit spreads
- 🔥 Identify risk differences between debit and credit positions
🚀 Master Options Strategies, Pass Series 7
Spreads and straddles are core parts of the Series 7 options section. Knowing not only the structures but also how to calculate outcomes is critical to passing the exam.
👉 Access Full Series 7 Options Strategy Guides and Practice Exams
Think strategically. Calculate precisely. Pass with confidence.