Options Practice Questions
Master Options for the Series 7 exam with comprehensive practice questions, detailed explanations, and proven study strategies.
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What You'll Learn
Options are a critical topic on the Series 7 exam, as they are a complex and widely used financial instrument. The exam will test your understanding of different option types, pricing, and trading strategies. Mastering options is essential for becoming a successful stockbroker, as options are commonly used by investors to manage risk and generate income. This section will cover the key concepts, common mistakes, and study tips to help you excel on the options portion of the Series 7 exam.
Key Concepts
Option Types
The two main types of options are call options and put options. Call options give the holder the right to buy the underlying asset at a predetermined price, while put options give the holder the right to sell the underlying asset at a predetermined price.
Option Pricing
Option prices are determined by several factors, including the current price of the underlying asset, the strike price, time to expiration, volatility, and interest rates. The Black-Scholes model is a widely used formula for calculating the theoretical value of an option.
Option Strategies
Investors can use a variety of option strategies, such as covered calls, protective puts, bull spreads, and bear spreads, to manage risk and generate income.
Option Greeks
The option Greeks, including delta, gamma, theta, and vega, measure the sensitivity of an option's price to changes in various factors, such as the underlying asset price, time to expiration, and volatility.
Exercise and Assignment
When an option is exercised, the holder of the option receives (or delivers) the underlying asset at the predetermined strike price. Options can be exercised early or at expiration, and the assignment process is the method by which the option seller is notified that their option has been exercised.
Common Mistakes to Avoid
- Confusing call options and put options
- Underestimating the impact of time decay (theta) on option prices
- Failing to understand the relationship between option Greeks and option pricing
- Overlooking the potential for early exercise on American-style options
- Misunderstanding the mechanics of the option assignment process
Sample Options Questions
Question 1
A customer purchases: 5 MO Jan 55 calls @ 3.15 and 5 MO Jan 55 puts @ 3.10. At what price points will they achieve break-even?
48.75 or 61.25
(Correct)51.90 or 58.10
55
47 or 62
Explanation:
Straddles feature two break-even levels: one on the call side (strike price plus total premium, or 55 + 6.25 = 61.25) and another on the put side (strike price minus total premium, or 55 - 6.25 = 48.75).
Question 2
Your client initiates a short position by selling 1000 ABC at 42 and mitigates potential losses by purchasing 10 ABC May 45 calls at 1.10. What is the customer's maximum possible loss?
$4,100.00
(Correct)Unlimited
$40,900
$1,100
Explanation:
The maximum loss is the difference between the break even at 40.90 and the strike price of 45. That is 4.10 x 1000 = $4,100.
Question 3
An option contract covering 12,500 British pounds has a 155 call strike price and a current option premium of 2.50. The British pound is currently quoted at 149.27. How much would a buyer pay for this option?
$312.50
(Correct)$149.27
$3,125.00
$31.25
Explanation:
To determine the total option premium, take the quoted premium of 2.50 and shift the decimal two places to the left, resulting in 0.025. Then, multiply this value by the amount of currency covered by the contract: 0.025 x 12,500 = $312.50.
Study Tips for Options
Practice calculating option prices using the Black-Scholes model and other methods
Familiarize yourself with common option trading strategies and their risk/reward profiles
Understand the relationship between the option Greeks and how they affect option prices
Review examples of option assignment and exercise to fully grasp the process
Stay up-to-date on current market conditions and how they impact option pricing
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Related Series 7 Topics
Series 7 Question Types
Frequently Asked Questions
How many Options questions are on the Series 7?
Options makes up approximately 15% of the Series 7 exam. Upsero includes hundreds of practice questions covering all aspects of this topic.
How do I study for Options?
Start with understanding the key concepts, then practice with realistic exam questions. Upsero's ReadyScore tracks your mastery of Options so you know when you're ready for the real exam.
Are the practice questions similar to the real Series 7?
Yes! Our Options questions are designed to match the exact format, difficulty, and style of the actual Series 7 exam. Many students say our questions are even harder than the real exam.