Options Contracts – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
📝 Options Contracts – Series 7 Exam
Options contracts are a major focus of the Series 7 Exam. Understanding how options work—both in theory and in practice—is critical for passing. The exam tests your knowledge of contract structure, terminology, rights and obligations of buyers and sellers, and the risks and strategies involved.
Here’s a full breakdown of what you need to know about options contracts for the Series 7.
📘 What Is an Options Contract?
An option is a contract giving the buyer the right, but not the obligation, to buy (call option) or sell (put option) a specified security at a predetermined price (the strike price) by a certain expiration date.
- 📈 Call Option: Right to buy
- 📉 Put Option: Right to sell
- 📅 Options have fixed expiration dates, typically the third Friday of the expiration month.
Each standard equity options contract covers 100 shares of the underlying stock.
🧩 Components of an Options Contract
| Component | Meaning |
|---|---|
| Underlying Asset | Stock, index, ETF, etc. |
| Strike Price | Price at which the buyer may exercise |
| Expiration Date | Last day the option can be exercised |
| Premium | Cost of the option (quoted per share) |
| Contract Size | Standard 100 shares per contract |
🛡️ Rights and Obligations
| Party | Call Option | Put Option |
|---|---|---|
| Buyer (Holder) | Right to buy at strike price | Right to sell at strike price |
| Seller (Writer) | Obligation to sell if exercised | Obligation to buy if exercised |
- ✅ Buyers pay the premium for the right
- ✅ Sellers receive the premium and accept the obligation
🔥 Basic Options Strategies
For Call Options:
- Buy Call (Long Call): Bullish; expect stock price to rise
- Sell Call (Short Call): Bearish or neutral; expect stock price to stay below strike
For Put Options:
- Buy Put (Long Put): Bearish; expect stock price to fall
- Sell Put (Short Put): Bullish or neutral; expect stock price to stay above strike
📊 Key Options Concepts for the Series 7
- Intrinsic Value:
- Call: Stock price – Strike price (if positive)
- Put: Strike price – Stock price (if positive)
- Time Value:
- Premium – Intrinsic Value
- Declines as expiration approaches (theta decay)
- In-the-Money (ITM):
- Call: Stock price > Strike price
- Put: Stock price < Strike price
- At-the-Money (ATM):
- Stock price = Strike price
- Out-of-the-Money (OTM):
- Call: Stock price < Strike price
- Put: Stock price > Strike price
📝 Example Question
An investor buys 1 XYZ June 50 Call at $4. What is the breakeven point?
A. $46
B. $50
C. $54
D. $56
✅ Correct Answer: C. $54
Explanation: Breakeven for a call option = strike price + premium = 50 + 4 = 54.
⚖️ Important Series 7 Exam Focus Points
- 📄 Options disclosure documents (ODD) must be delivered before or at account approval
- 🧮 Know how to calculate maximum gain, maximum loss, and breakeven for buyers and sellers
- 📈 Understand hedging strategies using options (protective puts, covered calls)
- ⏳ Be familiar with options exercise and assignment processes
- 📝 Recognize risks associated with options selling (especially uncovered calls)
🚀 Master Options, Pass Series 7
Options are a heavily weighted portion of the Series 7 Exam. Mastering terminology, math, strategies, and regulatory rules will greatly increase your chances of success.
👉 Access Full Series 7 Options Practice Tests and Study Tools
Understand the contracts. Apply the strategies. Pass with confidence.