Series 7 Options Questions – Test Your Skills

🧾 Series 7 Options Questions – Test Your Skills
📘 How Well Do You Know Options? Test Your Knowledge for the Series 7 Exam

The Series 7 exam covers a wide range of financial products, and options are a critical part of the exam. Here are some practice questions on options trading to test your skills and understanding of this complex topic. Review the questions and answers carefully, and use the explanations to reinforce your knowledge.

🎯 Question 1: Option Contracts – Long Call

If an investor buys a call option with a strike price of $50 and the stock price rises to $60, which of the following statements is TRUE?

A) The investor has made a profit of $10 per share.
B) The investor will exercise the option to buy the stock at $60.
C) The investor has incurred a loss of $10 per share.
D) The investor will exercise the option to buy the stock at $50.

Answer: D) The investor will exercise the option to buy the stock at $50.

Explanation:
A call option gives the investor the right to buy the stock at the strike price. In this case, the strike price is $50, and the stock is now worth $60. The investor will exercise the option to buy at $50 and sell at the current market price of $60, making a profit of $10 per share (minus the cost of the option premium).

🎯 Question 2: Option Contracts – Covered Call

An investor owns 100 shares of XYZ stock, currently priced at $40 per share. The investor sells a call option with a strike price of $45. Which of the following is TRUE?

A) The investor will be obligated to sell the shares at $40 if the option is exercised.
B) The investor will receive a premium and still have the potential for unlimited profit if the stock price rises.
C) The investor will be obligated to sell the shares at $45 if the option is exercised.
D) The investor will have to buy back the option if the stock price rises above $45.

Answer: C) The investor will be obligated to sell the shares at $45 if the option is exercised.

Explanation:
A covered call is a strategy where an investor owns the underlying stock and sells a call option against it. If the stock price rises above the strike price of $45, the investor will be obligated to sell the stock at $45, but they still keep the premium received from selling the call. This strategy limits the potential profit (since the stock will be sold at $45), but it provides some income through the option premium.

🎯 Question 3: Option Premium – Intrinsic Value

Which of the following factors affects the intrinsic value of a call option?

A) The time remaining until expiration
B) The difference between the stock price and the strike price
C) The volatility of the underlying stock
D) The interest rates in the economy

Answer: B) The difference between the stock price and the strike price

Explanation:
The intrinsic value of a call option is determined by the difference between the stock price and the strike price. If the stock price is higher than the strike price, the option has intrinsic value. If the stock price is lower than the strike price, the option has no intrinsic value. Other factors like time until expiration or volatility affect the extrinsic value (time value), not intrinsic value.

🎯 Question 4: Option Premium – Time Value

Which of the following statements about time value of an option is TRUE?

A) Time value is highest when the option is at expiration.
B) Time value decreases as the expiration date approaches.
C) Time value increases when the underlying stock price moves in favor of the option holder.
D) Time value is unaffected by the time remaining until expiration.

Answer: B) Time value decreases as the expiration date approaches.

Explanation:
Time value of an option reflects the amount of time remaining until expiration. As expiration nears, the time value decreases because there is less time for the option to become profitable. This is known as time decay. The closer the option gets to expiration, the lower its time value, and this impacts the premium.

🎯 Question 5: Put Option – Exercise

An investor purchases a put option with a strike price of $60. The stock is currently trading at $55. Which of the following is TRUE?

A) The investor has no reason to exercise the put option.
B) The investor can exercise the option and sell the stock at $60.
C) The investor has a potential loss of $5 per share.
D) The investor can sell the stock at $55.

Answer: B) The investor can exercise the option and sell the stock at $60.

Explanation:
A put option gives the investor the right to sell the stock at the strike price. In this case, the strike price is $60, and the stock is trading at $55. The investor can exercise the option and sell the stock for $60, making a $5 profit per share (minus the premium paid for the option). The option is in-the-money because the stock price is below the strike price.

🎯 Question 6: Option Strategy – Protective Put

An investor who owns 100 shares of XYZ stock at $50 per share buys a protective put option with a strike price of $45. What is the primary benefit of this strategy?

A) The investor will receive unlimited profits if the stock price rises.
B) The investor will be protected against significant losses if the stock price falls below $45.
C) The investor will earn premium income from the put option.
D) The investor will be required to sell the stock at $45 if the stock price rises above $45.

Answer: B) The investor will be protected against significant losses if the stock price falls below $45.

Explanation:
A protective put is a strategy where an investor buys a put option as a form of insurance against a decline in the price of the stock they own. In this case, the investor owns XYZ stock at $50 and buys a put option with a strike price of $45. If the stock price falls below $45, the investor can exercise the put to sell the stock at $45, limiting their losses. The maximum loss is the difference between the stock price and the put strike price, plus the premium paid for the put option.

🚀 Conclusion

These practice questions on options are a great way to test your understanding and prepare for the Series 7 exam. Options trading can be complex, but with practice, you’ll gain a strong grasp of the concepts and be ready to tackle the exam.

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