Options (the highest-yield, hardest area)

Options are the area that decides more Series 7 outcomes than any other. They are also the most procedural — if you learn the four positions and a short list of formulas, and you draw the picture every time, options become reliable points. Work every example with a pencil.

The four basic positions

A standard listed option covers 100 shares. Premiums are quoted per share, so a premium of "4" costs $400 for one contract.

• Long call — right to buy at the strike. Bullish. Max loss = premium; max gain = unlimited.
• Short call — obligation to sell if assigned. Bearish. Max gain = premium; max loss = unlimited (if uncovered).
• Long put — right to sell at the strike. Bearish. Max loss = premium; max gain = (strike − premium) × 100 (stock can only fall to zero).
• Short put — obligation to buy if assigned. Bullish. Max gain = premium; max loss = (strike − premium) × 100.

Two anchors: "Calls up, puts down" (you exercise a call when the market is above the strike, a put when below), and the buyer's loss is always limited to the premium.

Breakeven

• Call breakeven = strike + premium (call up).
• Put breakeven = strike − premium (put down).

Hedging with options

• Covered call — long stock + short call. Generates income; breakeven = stock cost − premium; caps upside at the strike.
• Protective put — long stock + long put. Buys downside insurance; max loss = (stock cost − strike) + premium, per share.

Spreads

A spread is a long and a short option of the same type (both calls or both puts) with different strikes and/or expirations.

• Debit spread — you pay a net premium (the long leg costs more). You are buying the spread and want it to widen; you profit by exercising. Max loss = net debit; max gain = (difference in strikes − net debit) × 100.
• Credit spread — you receive a net premium. You want the spread to narrow/expire. Max gain = net credit; max loss = (difference in strikes − net credit) × 100.

For any vertical spread, maximum gain + maximum loss = the difference in strikes × 100 — a fast check.

Straddles and combinations

• Long straddle — buy a call and a put, same strike and expiration. A bet on big movement in either direction (volatility). Breakevens = strike ± total premium; max loss = total premium.
• Short straddle — sell both. A bet the stock stays flat; gain limited to total premium, loss unlimited on the call side.

Account rules

• The Options Disclosure Document (ODD) — Characteristics and Risks of Standardized Options — must be delivered at or before account approval (FINRA Rule 2360).
• A qualified Registered Options Principal (ROP) must approve the account before the first options trade (FINRA Rule 2360).
• The signed options agreement is due within 15 days after account approval (FINRA Rule 2360).
• The OCC issues and guarantees every listed option (the central counterparty).
• Options premiums settle T+1 (next business day).

Key facts — Options - Contract = 100 shares; premium × 100 = dollars. - Call BE = strike + premium; Put BE = strike − premium. - Long option max loss = premium; long call gain unlimited; long put gain (strike − premium)×100. - Uncovered short call loss = unlimited; short put loss = (strike − premium)×100. - Covered call BE = stock cost − premium; protective put max loss = (cost − strike) + premium. - Debit spread: want it to widen, exercise; max loss = net debit. Credit spread: want it to narrow/expire; max loss = strikes − net credit. - Vertical spread: max gain + max loss = strike difference × 100. - Long straddle BE = strike ± total premium (bet on volatility). - ODD at/before approval; ROP approves before first trade; OCC guarantees.

Worked example — bull call (debit) spread, full P&L

An investor is long 1 Jul 70 call at 5 and short 1 Jul 80 call at 2.

1. Net premium = 5 paid − 2 received = 3 debit → this is a debit spread (bullish).
2. Max loss = net debit = $300 (both expire worthless).
3. Max gain = (strike difference − net debit) × 100 = (10 − 3) × 100 = $700 (stock at or above 80; both exercised).
4. Check: max gain + max loss = $700 + $300 = $1,000 = strike difference (10) × 100. ✓
5. Breakeven = lower strike + net debit = 70 + 3 = 73.

Worked example — protective put max loss

A customer buys 100 shares at 48 and buys 1 45 put at 2. The put lets them sell at 45 no matter how far the stock falls. Max loss = (48 − 45) + 2 = 5 per share = $500. The put is the floor; the only cost above that floor is the premium.

Exam traps

• Debit vs. credit reversed. Debit = you paid, want it to widen, profit by exercising. Credit = you were paid, want it to expire.
• Forgetting × 100. Every dollar figure is per-share premium × 100.
• Long put max gain = unlimited. No — a stock stops at zero, so it's (strike − premium) × 100.
• Straddle breakeven with one premium. Use the total of both premiums, added and subtracted from the strike.
• Covered call is high-risk. It is comparatively conservative (income + limited upside); the naked call is the unlimited-risk position.