22 Options Practice Questions & Answers

Every Options practice question from the Series 7 Practice Test, with the correct answer and a short explanation.

1. An investor with no position in the underlying stock writes one XYZ 55 put and receives the premium. Which statement correctly describes the writer's position?
- A.The writer is obligated to deliver 100 shares at $55 per share if assigned.
- B.The writer has the right to buy 100 shares at $55 per share.
- C.The writer is obligated to buy 100 shares at $55 per share if assigned.✓ Answer
- D.The writer has the right to sell 100 shares at $55 per share.
In every listed option the buyer pays the premium and therefore holds the right, while the writer receives the premium and takes on the obligation. A put gives its holder the right to sell the underlying at the strike, so the assigned put writer must be the purchaser: he buys 100 shares at $55 regardless of the market price.
Source: FINRA Series 7 General Securities Representative Exam Content Outline — listed options (rights and obligations); Characteristics and Risks of Standardized Options (OCC)Report a problem with this question
2. XYZ common stock is trading at $47 per share. An XYZ 55 put is quoted at 9.50. How much of that premium is time value?
- A.$9.50 per share
- B.$1.50 per share✓ Answer
- C.None, because the option is out of the money and therefore has no time value
- D.$8.00 per share
A put is in the money when the market price is below the strike, so the intrinsic value is $55 - $47 = $8 per share. Premium equals intrinsic value plus time value, so $9.50 - $8.00 leaves $1.50 of time value.
Source: FINRA Series 7 Content Outline — premium, intrinsic value and time value of listed optionsReport a problem with this question
3. An investor holds a listed equity call that is out of the money with three weeks remaining until expiration. Which statement about the option's premium is correct?
- A.The premium stays essentially unchanged until the final trading day and then disappears all at once.
- B.The premium consists entirely of intrinsic value because the contract has not yet expired.
- C.The premium equals negative intrinsic value plus time value.
- D.The premium is entirely time value, and that time value erodes at an accelerating rate as expiration approaches.✓ Answer
Intrinsic value can never be less than zero, so an out-of-the-money option has no intrinsic value at all and its entire premium is time value. Time value decays continuously and the rate of decay increases as the expiration date nears, reaching zero at expiration.
Source: FINRA Series 7 Content Outline — premium, intrinsic value and time value; Characteristics and Risks of Standardized Options (OCC)Report a problem with this question
4. A customer buys 1 ABC October 60 call at 4.25. At what price of ABC at expiration does the customer break even?
- A.$68.50
- B.$64.25✓ Answer
- C.$60.00
- D.$55.75
For a call with no stock position involved, breakeven is the strike price plus the premium paid, because the option must gain enough intrinsic value to repay the $4.25 cost: $60 + $4.25 = $64.25.
Source: FINRA Series 7 Content Outline — profit-and-loss and breakeven calculations for listed optionsReport a problem with this question
5. A customer who has no position in the underlying stock writes 1 DEF 45 call at 3. What are the customer's maximum potential gain and maximum potential loss?
- A.Maximum gain $300; maximum loss unlimited✓ Answer
- B.Maximum gain unlimited; maximum loss $300
- C.Maximum gain $4,500; maximum loss $300
- D.Maximum gain $300; maximum loss $4,200
The writer's money in is the premium of 3 times the 100-share contract multiplier, or $300, which is all he can ever keep. Because the call is uncovered, an assignment forces him to buy the stock in the market at whatever price it has reached, and since a share price has no ceiling the loss is theoretically unlimited.
Source: FINRA Series 7 Content Outline — uncovered writing; maximum gain, maximum loss and breakevenReport a problem with this question
6. A customer buys 1 GHI 70 put at 5.50 and holds no other position. What is the maximum possible gain?
- A.$5,500
- B.$7,000
- C.$6,450✓ Answer
- D.Unlimited
A put holder profits as the stock falls, but a share price can fall no lower than zero, so the best case is exercising at the $70 strike against worthless stock. The gain is the strike minus the premium paid: ($70 - $5.50) x 100 = $6,450.
Source: FINRA Series 7 Content Outline — profit-and-loss and breakeven calculations for listed optionsReport a problem with this question
7. A customer writes 1 JKL 30 put at 2.25 and has no other position in JKL. What is the maximum potential loss?
- A.Unlimited
- B.$3,000
- C.$2,775✓ Answer
- D.$225
The worst case for a put writer is the stock falling to zero, in which case he is assigned and must pay $30 per share for stock worth nothing. He keeps the $2.25 premium, so the net loss is ($30 - $2.25) x 100 = $2,775; the loss is large but finite, unlike that of an uncovered call.
Source: FINRA Series 7 Content Outline — profit-and-loss and breakeven calculations for listed optionsReport a problem with this question
8. A customer buys 100 shares of MNO at $62 per share and at the same time writes 1 MNO 65 call at 3. What is the maximum potential gain on the combined position?
- A.$600✓ Answer
- B.$300
- C.$900
- D.Unlimited, because the customer owns the stock
This is a covered call. The most the customer can make is the stock's appreciation up to the strike, $65 - $62 = $3 per share, plus the $3 premium retained, for $6 per share or $600. Writing the call caps the upside above $65 in exchange for the income.
Source: FINRA Series 7 Content Outline — covered call writing; profit-and-loss calculationsReport a problem with this question
9. A customer buys 100 shares of PQR at $48 per share and buys 1 PQR 45 put at 2 as protection. What is the maximum potential loss on the position?
- A.$4,800
- B.$300
- C.$500✓ Answer
- D.$200
The long put lets the customer sell at $45 no matter how far the stock falls, so the loss on the stock is capped at $48 - $45 = $3 per share, and the $2 premium is an additional cost. Maximum loss is ($3 + $2) x 100 = $500, which is the price of the insurance the put provides.
Source: FINRA Series 7 Content Outline — protective (married) puts; profit-and-loss calculationsReport a problem with this question
10. A customer buys 100 shares of STU at $71 per share and buys 1 STU 70 put at 2.50. At what price of STU at expiration does the customer break even?
- A.$73.50✓ Answer
- B.$67.50
- C.$72.50
- D.$68.50
Whenever the position includes stock, breakeven is measured from the stock's cost, not from the strike price. The customer has spent $71 on the shares plus $2.50 on the put, so the stock must reach $73.50 for the total outlay to be recovered.
Source: FINRA Series 7 Content Outline — breakeven calculations for positions combining stock and optionsReport a problem with this question
11. A customer who owns 100 shares purchased at $54 buys 1 50 put and writes 1 60 call on that stock, both with the same expiration. Which statement best describes the resulting position?
- A.Losses are limited below $50 by the long put, gains are capped above $60 by the short call, and the premium received on the call offsets the cost of the put.✓ Answer
- B.The position converts the shares into a cash-settled contract.
- C.The position eliminates all risk of loss while leaving the upside unlimited.
- D.The short call obligates the customer to buy 100 additional shares at $60 if assigned.
This is a collar: the long put is insurance that sets a floor at $50 and the short call finances that insurance while creating an obligation to deliver the shares owned at $60. The investor trades away appreciation above the call strike in exchange for cheap downside protection, so risk is bounded on both sides rather than eliminated.
Source: FINRA Series 7 Content Outline — hedging strategies with listed options (protective puts and covered call writing)Report a problem with this question
12. A customer buys 1 VWX 50 call at 5 and writes 1 VWX 60 call at 2, both with the same expiration. What is the maximum potential gain?
- A.$700✓ Answer
- B.Unlimited
- C.$300
- D.$1,000
Identify the position first: same underlying, same type, one long and one short at different strikes, with more money paid than received, so it is a bullish debit call spread with a net debit of $3. Maximum gain is the difference in strikes minus the net debit, ($10 - $3) x 100 = $700, achieved if the stock closes at or above $60.
Source: FINRA Series 7 Content Outline — debit and credit spreads; profit-and-loss and breakeven calculationsReport a problem with this question
13. A customer writes 1 YZA 40 put at 4 and buys 1 YZA 35 put at 1.50, both with the same expiration. What is the maximum potential loss?
- A.$400
- B.$500
- C.$250✓ Answer
- D.$3,750
More premium comes in ($4) than goes out ($1.50), so this is a credit spread with a net credit of $2.50 that the customer keeps if both puts expire worthless. The long 35 put caps the damage, so maximum loss is the difference in strikes minus the credit: ($5 - $2.50) x 100 = $250.
Source: FINRA Series 7 Content Outline — debit and credit spreads; profit-and-loss and breakeven calculationsReport a problem with this question
14. A customer writes 1 BCD 80 put at 6 and buys 1 BCD 70 put at 2, both with the same expiration. At what price of BCD at expiration does the position break even?
- A.$72
- B.$84
- C.$74
- D.$76✓ Answer
In any spread built with puts, breakeven is the higher strike minus the net premium; in a spread built with calls it is the lower strike plus the net premium. Here the net premium is the $4 credit, so breakeven is $80 - $4 = $76, and the customer profits as long as BCD stays above that level.
Source: FINRA Series 7 Content Outline — breakeven calculations for option spreadsReport a problem with this question
15. A customer buys 1 EFG 55 call at 3 and buys 1 EFG 55 put at 2.50, both with the same expiration. What are the breakeven points at expiration?
- A.$58.00 and $52.50
- B.$61.50 and $48.50
- C.$55.00 only
- D.$60.50 and $49.50✓ Answer
A long straddle always has two breakevens because either leg can produce the profit. Total premium paid is $3 + $2.50 = $5.50, so the stock must rise to $55 + $5.50 = $60.50 or fall to $55 - $5.50 = $49.50 before the position turns profitable.
Source: FINRA Series 7 Content Outline — straddles and combinations; breakeven calculationsReport a problem with this question
16. A customer writes 1 HIJ 40 call at 2 and writes 1 HIJ 40 put at 1.75 with the same expiration, and holds no position in HIJ stock. Which statement is correct?
- A.Maximum gain is unlimited if the stock moves sharply in either direction.
- B.Maximum gain is $375, realized only if HIJ closes exactly at $40 at expiration, and the potential loss on the call side is unlimited.✓ Answer
- C.Maximum gain is $200 and the position profits from a large move in either direction.
- D.Maximum gain is $375 and maximum loss is $4,000.
This is a short straddle, a bet that the stock stays still. The writer keeps the full $375 of premium only if both contracts expire exactly at the money at $40; any move away from the strike eats into it, and because the short call is uncovered a sharp rally exposes the customer to unlimited loss.
Source: FINRA Series 7 Content Outline — straddles and combinations; uncovered writingReport a problem with this question
17. A customer believes that a pending court ruling will move a stock sharply but has no view on which direction it will move. Which position fits that outlook, and why?
- A.Buy a call and a put with the same strike and expiration, because the position profits from a large move in either direction once the stock passes one of its two breakevens.✓ Answer
- B.Write a call and a put with the same strike and expiration, because the premiums are collected up front.
- C.Buy a call and write a put at the same strike, because the combination is direction-neutral.
- D.Buy the stock and write a call against it, because premium income offsets volatility.
A long straddle is the classic volatility position: the customer pays two premiums and needs movement, not direction, because a rally is captured by the call and a decline by the put. Writing a straddle is the opposite bet, profiting only if the stock stands still, and buying a call while writing a put is a bullish, directional position.
Source: FINRA Series 7 Content Outline — advanced strategies (straddles and combinations); suitability of options strategiesReport a problem with this question
18. A customer holds 500 shares of a stock long, expects the price to stay roughly flat for several months, and wants additional income from the holding. Why is writing calls against those shares consistent with that objective?
- A.Because writing calls guarantees the customer a profit on the shares.
- B.Because the premium is received immediately, and the shares already owned satisfy the delivery obligation if the calls are assigned, so the principal cost is giving up appreciation above the strike.✓ Answer
- C.Because covered writing converts the long stock position into a short position.
- D.Because the premium received removes the downside risk in the shares.
Covered call writing is an income strategy for a neutral to modestly bullish holder: the premium is credited at once and the long shares stand behind the obligation, so assignment simply means delivering stock already owned. The premium cushions a small decline but does not eliminate downside risk, and the trade-off is forfeiting gains above the strike price.
Source: FINRA Series 7 Content Outline — covered call writing; suitability of options strategiesReport a problem with this question
19. The holder of a listed equity call submits an exercise notice. How is that exercise assigned to a writer?
- A.The exercising customer's broker-dealer picks a writer from among its own customers who are short that series.
- B.The exercising customer may name the writer who is to be assigned.
- C.OCC always assigns the oldest short position outstanding among all clearing members.
- D.OCC assigns the notice at random to a clearing member carrying a short position in that series, and the member then allocates it to one of its customers at random, on a first-in first-out basis, or by another fair method disclosed to customers.✓ Answer
The Options Clearing Corporation is the issuer, guarantor and common counterparty to every listed option, so exercises flow from the holder's firm to OCC, which assigns randomly among clearing members short that series. The assigned member then allocates to its own customers by random selection, first-in first-out, or another fair method it has described to customers; a writer has no control over whether he is assigned.
Source: OCC Rules on exercise and assignment; FINRA Rule 2360 (allocation of exercise assignment notices); Characteristics and Risks of Standardized OptionsReport a problem with this question
20. A customer is long 1 KLM October 40 call covering 100 shares when KLM declares a 5-for-4 stock split. After the contract is adjusted, the customer holds which of the following?
- A.1 contract with a strike of 40 covering 100 shares, because only even splits cause an adjustment
- B.1 contract with a strike of 50 covering 80 shares
- C.5 contracts with a strike of 32, each covering 100 shares
- D.1 contract with a strike of 32 covering 125 shares✓ Answer
An uneven split such as 5-for-4 does not change the number of contracts; instead the strike is multiplied by the inverse of the ratio and the deliverable is increased, so $40 x 4/5 = $32 and 100 x 5/4 = 125 shares. Only whole-number splits such as 2-for-1 multiply the contract count while keeping a 100-share deliverable, and in either case the aggregate exercise price stays $4,000.
Source: Characteristics and Risks of Standardized Options (OCC) — adjustment of listed options contract terms for stock splits and stock dividendsReport a problem with this question
21. When must a customer be furnished with the current options disclosure document, Characteristics and Risks of Standardized Options?
- A.Only if the customer asks for it in writing
- B.Within 15 days after the account is approved for options trading
- C.At or prior to the time the account is approved for options trading✓ Answer
- D.With the confirmation of the customer's first options transaction
The disclosure document must reach the customer at or before the time the account is approved, so that the risks are disclosed before any options trade can occur; a Registered Options Principal must also approve the account in writing beforehand. It is the customer's signed options agreement, not the disclosure document, that is due within 15 days after approval.
Source: FINRA Rule 2360 (Options) — delivery of the options disclosure document and account approval requirementsReport a problem with this question
22. A customer exercises a broad-based index call option. How is that exercise settled?
- A.In cash, for the difference between the index settlement value and the strike price, multiplied by the contract multiplier✓ Answer
- B.The writer chooses between paying cash and delivering the component securities
- C.By delivery of the securities that make up the index against payment of the aggregate exercise price
- D.By delivery of exchange-traded fund shares that track the index
Index options have no deliverable security, so exercise settles in cash: the assigned writer pays the exercise settlement amount, calculated as the difference between the index settlement value and the strike times the contract multiplier, and the credit and debit are made the next business day. Delivery of the index components is never an option for either party.
Source: Characteristics and Risks of Standardized Options (OCC) — cash-settled index options; FINRA Series 7 Content Outline (index options)Report a problem with this question

Practice questions based on the FINRA Series 7 content outline and on named federal securities statutes and FINRA, MSRB and SEC rules. Not affiliated with or endorsed by FINRA, and not investment advice. Amounts that are re-set periodically — rates, fee schedules, contribution limits and penalty amounts — are deliberately kept out of the answers; where a computation needs such a figure, the question supplies it. Confirm current requirements with FINRA and your firm before testing. About the Series 7 exam (FINRA) →

1. An investor with no position in the underlying stock writes one XYZ 55 put and receives the premium. Which statement correctly describes the writer's position?

2. XYZ common stock is trading at $47 per share. An XYZ 55 put is quoted at 9.50. How much of that premium is time value?

3. An investor holds a listed equity call that is out of the money with three weeks remaining until expiration. Which statement about the option's premium is correct?

4. A customer buys 1 ABC October 60 call at 4.25. At what price of ABC at expiration does the customer break even?

5. A customer who has no position in the underlying stock writes 1 DEF 45 call at 3. What are the customer's maximum potential gain and maximum potential loss?

6. A customer buys 1 GHI 70 put at 5.50 and holds no other position. What is the maximum possible gain?

7. A customer writes 1 JKL 30 put at 2.25 and has no other position in JKL. What is the maximum potential loss?

8. A customer buys 100 shares of MNO at $62 per share and at the same time writes 1 MNO 65 call at 3. What is the maximum potential gain on the combined position?

9. A customer buys 100 shares of PQR at $48 per share and buys 1 PQR 45 put at 2 as protection. What is the maximum potential loss on the position?

10. A customer buys 100 shares of STU at $71 per share and buys 1 STU 70 put at 2.50. At what price of STU at expiration does the customer break even?

11. A customer who owns 100 shares purchased at $54 buys 1 50 put and writes 1 60 call on that stock, both with the same expiration. Which statement best describes the resulting position?

12. A customer buys 1 VWX 50 call at 5 and writes 1 VWX 60 call at 2, both with the same expiration. What is the maximum potential gain?

13. A customer writes 1 YZA 40 put at 4 and buys 1 YZA 35 put at 1.50, both with the same expiration. What is the maximum potential loss?

14. A customer writes 1 BCD 80 put at 6 and buys 1 BCD 70 put at 2, both with the same expiration. At what price of BCD at expiration does the position break even?

15. A customer buys 1 EFG 55 call at 3 and buys 1 EFG 55 put at 2.50, both with the same expiration. What are the breakeven points at expiration?

16. A customer writes 1 HIJ 40 call at 2 and writes 1 HIJ 40 put at 1.75 with the same expiration, and holds no position in HIJ stock. Which statement is correct?

17. A customer believes that a pending court ruling will move a stock sharply but has no view on which direction it will move. Which position fits that outlook, and why?

18. A customer holds 500 shares of a stock long, expects the price to stay roughly flat for several months, and wants additional income from the holding. Why is writing calls against those shares consistent with that objective?

19. The holder of a listed equity call submits an exercise notice. How is that exercise assigned to a writer?

20. A customer is long 1 KLM October 40 call covering 100 shares when KLM declares a 5-for-4 stock split. After the contract is adjusted, the customer holds which of the following?

21. When must a customer be furnished with the current options disclosure document, Characteristics and Risks of Standardized Options?

22. A customer exercises a broad-based index call option. How is that exercise settled?