FINRA Series 7 — All Questions

A portfolio plots below the efficient frontier on a risk-and-return chart. What does that tell an analyst?

• a.The portfolio's expected return is below the risk-free rate
• b.A portfolio with the same risk and a higher return exists✓
• c.The portfolio holds only market risk and no company-specific risk
• d.The portfolio has a beta below 1.0 and so is not diversified

The efficient frontier shows the highest expected return available at each level of risk. A portfolio below it is inefficient: the same return could be earned with less risk, or more return could be earned at the same risk. A position below the line says nothing about its beta, nor does it mean the return is below the risk-free rate or that only market risk remains.Portfolio theory: efficient frontier

A customer has both a traditional IRA and a taxable account. Which holding is the poorest choice to place inside the traditional IRA?

• a.A high-turnover fund that distributes short-term gains
• b.Taxable corporate bonds, whose interest is taxed each year
• c.Municipal bonds, whose tax-exempt interest gains nothing there✓
• d.REIT shares that pay large taxable dividends each year

Interest from municipal bonds is already exempt from federal income tax, so holding them in a traditional IRA wastes that benefit, and withdrawals are taxed as ordinary income anyway. Corporate bonds, REIT shares and high-turnover funds all produce income that would be taxed currently in a taxable account, so sheltering them in the IRA is the better use of the account.Portfolio construction: asset location and taxes

A portfolio is 60% invested in a stock with a beta of 1.5 and 40% in a stock with a beta of 0.5. If the market falls 10%, by about how much is the portfolio expected to decline?

• a.9%
• b.11%✓
• c.15%
• d.10%

Portfolio beta is the weighted average: 0.6 x 1.5 + 0.4 x 0.5 = 0.90 + 0.20 = 1.10. A beta of 1.10 means the portfolio moves 1.10 times the market, so a 10% decline in the market implies about an 11% decline. The 10% figure uses a simple average beta of 1.0. The 15% figure uses only the higher beta. The 9% figure uses only the 0.90 contribution of the first stock.Portfolio theory: portfolio beta

A company is soliciting proxies for an annual meeting at which directors will be elected. When must the annual report to shareholders be furnished?

• a.Only to shareholders who ask for a copy
• b.With the proxy statement or before it✓
• c.Within 30 days after the proxy statement
• d.Within 90 days after the meeting takes place

Under Rule 14a-3(b), when directors are to be elected at the meeting, the annual report must accompany or precede the proxy statement so that holders can read the financial results before they vote. It is not delivered after the meeting, and it is not limited to holders who request it.Annual reports and proxy statements: Rule 14a-3

A stock closes at $90 per share on the day before a 3-for-2 forward split takes effect. With no other news, what is the theoretical opening price after the split?

• a.$30.00
• b.$60.00✓
• c.$135.00
• d.$45.00

A 3-for-2 split gives holders three shares for every two, so total market value is unchanged and the price adjusts by the inverse ratio: $90 x 2 / 3 = $60.00. The $135.00 figure multiplies by 3/2, which is what a reverse split would do. The $30.00 figure divides by three and ignores the two. The $45.00 figure treats the event as a 2-for-1 split.Corporate actions: forward split and share price

A bidder seeks 1,000,000 shares in a partial tender offer, and 2,500,000 shares are validly tendered. If the offer is prorated, how many of a customer's 10,000 tendered shares are accepted?

• a.6,000 shares
• b.10,000 shares
• c.2,500 shares
• d.4,000 shares✓

In a partial tender offer, shares are taken up pro rata among those tendered. The proration factor is 1,000,000 / 2,500,000 = 40%, so 40% of 10,000 = 4,000 shares are accepted and the rest are returned. The 10,000-share answer assumes everything tendered is taken. The 6,000-share answer uses the 60% that is not accepted. The 2,500-share answer divides by four instead of applying 40%.Tender offers: Rule 14d-8 proration

The bidder has taken substantial steps toward a tender offer that has not been announced. An analyst at a firm that advises the bidder learns of it and buys target shares for her own account. Which statement is correct?

• a.She violates Rule 14e-3, which bars trading on tender offer information from the bidder✓
• b.She does not violate it, because the information did not come from the target
• c.She does not violate it, provided the purchase is under 5% of the target's shares
• d.She does not violate it, since she owes no duty to the target's shareholders

Rule 14e-3 makes it fraudulent to trade on material, nonpublic information about a tender offer when the trader knows it came from the bidder, the target or their agents and the bidder has taken substantial steps. No breach of duty to the target's shareholders is needed and the source need not be the target. The 5% figure is a Schedule 13D concept and creates no safe harbor.Tender offers: Rule 14e-3

A partial tender offer is made for XYZ stock. A customer owns 5,000 shares of XYZ and is short 2,000 shares. What is the most she may tender?

• a.3,000 shares✓
• b.5,000 shares
• c.2,000 shares
• d.7,000 shares

Rule 14e-4 allows a person to tender in a partial tender offer only up to the net long position, which is the long position minus the short position: 5,000 - 2,000 = 3,000 shares. The 5,000-share answer ignores the short sale. The 7,000-share answer adds the short instead of subtracting it. The 2,000-share answer is the short position alone.Tender offers: Rule 14e-4 net long position

Which of the following corporate actions requires the shareholder to decide whether to participate?

• a.A tender offer for the company's common shares✓
• b.A forward stock split declared by the board
• c.A cash dividend declared by the board
• d.A mandatory call of convertible preferred

A tender offer is voluntary: each holder chooses whether to tender, and holders who do nothing keep their shares. Splits and cash dividends happen to all holders automatically. A mandatory call forces redemption or conversion on the terms of the security, so no decision is needed for it to take effect.Corporate actions: voluntary vs mandatory

A parent company distributes shares of its subsidiary Spinco at a ratio of one Spinco share for every five parent shares. How many Spinco shares does a customer who owns 500 parent shares receive?

• a.2,500 shares
• b.500 shares
• c.100 shares✓
• d.5 shares

In a spin-off, holders receive shares of the subsidiary in proportion to their parent shares: 500 / 5 = 100 Spinco shares, and the parent shares stay in the account. The 2,500-share answer multiplies by five instead of dividing. The 500-share answer assumes one-for-one. The 5-share answer divides by 100.Corporate actions: spin-offs

A customer owns a 7% bond callable at 103, and market rates for similar bonds have fallen to 4%. Which risk is most directly threatening her income stream?

• a.Interest rate risk, since the bond's price will fall as market rates fall
• b.Call risk, since the issuer may redeem it early and she must reinvest at 4%✓
• c.Credit risk, since the issuer's ability to pay weakens as rates fall
• d.Purchasing power risk, since lower rates reduce her income's real value

When rates fall well below a bond's coupon, an issuer has an incentive to call the bond and refinance at the lower rate. The holder is left with the call price and must reinvest at about 4%, which cuts her income. A bond's price rises, not falls, when market rates fall. Falling rates do not impair the issuer's credit, and the threat here is a lost coupon, not inflation.Investment risk: call risk

A retiree who planned to hold her actively traded blue-chip stocks for ten years must sell them to pay a medical bill, during a bear market that has cut their price by a third. The shares sell instantly. Which risk does this describe?

• a.Credit risk
• b.Timing risk✓
• c.Liquidity risk
• d.Reinvestment risk

Timing risk is the risk of being forced to buy or sell at an unfavorable moment. Here the need for cash forced a sale at a depressed price. Liquidity risk is the difficulty of selling without a large price concession, and these shares sell instantly. Credit risk concerns an issuer's ability to pay, and reinvestment risk concerns where interest and principal can be reinvested.Investment risk: timing risk

A U.S. investor buys a stock listed in euros. Over the year its euro price rises 10%, but the euro falls 10% against the dollar. What is the investor's approximate return in dollars?

• a.No net change
• b.A loss of 1%✓
• c.A loss of 10%
• d.A gain of 10%

The dollar value changes by the product of the two moves: 1.10 x 0.90 = 0.99, a loss of 1%. A gain of 10% counts the local price rise and ignores the currency. A loss of 10% counts the currency and ignores the local gain. Simply netting 10% against 10% to get no change overlooks that the percentages compound.Investment risk: currency risk

A customer owns a thinly traded corporate bond. When she tries to sell, the best bid is far below the last reported trade, and few dealers will quote it. Which risk is she facing?

• a.Legislative risk
• b.Liquidity risk✓
• c.Prepayment risk
• d.Reinvestment risk

Liquidity risk is the risk that an investment cannot be sold quickly without accepting a substantial price concession. The wide bid-ask gap and the lack of dealers are the signs. Prepayment risk applies to mortgage-backed securities, reinvestment risk concerns the rate earned on cash received, and legislative risk concerns changes in law.Investment risk: liquidity risk

A customer plans to invest $500,000 in a fund family and hold it for at least 15 years. Which share class generally fits best?

• a.Class C, because its contingent deferred charge ends after one year
• b.Class C, because there is no front-end charge and nothing is paid up front
• c.Class A, since breakpoints cut the sales charge and its 12b-1 fee is lower✓
• d.Either class, because the total cost over a long hold is the same

At $500,000 a Class A purchase earns breakpoint discounts on the front-end load, and Class A carries a lower annual 12b-1 fee than the level-load Class C. Over a long holding period the higher ongoing fee in Class C compounds, so Class C usually costs more. Avoiding a charge up front or after a year does not make up for paying the higher fee every year.Costs and fees: mutual fund share classes

A client has a $400,000 portfolio and makes four trades a year with a commission of $275 each. A fee-based account would charge 1.25% of assets a year. How much more would the client pay each year in the fee-based account?

• a.$6,100 more
• b.$1,100 more
• c.$5,000 more
• d.$3,900 more✓

The fee-based account costs 1.25% x $400,000 = $5,000. The commission account costs 4 x $275 = $1,100. The difference is $5,000 - $1,100 = $3,900. The $5,000 figure is the fee alone, and the $1,100 figure is the commissions alone. The $6,100 figure adds the two instead of comparing them. For a low-trading client the fee-based account may not be suitable.Costs and fees: fee-based vs commission accounts

A variable annuity's surrender charge is 7% in contract year 1 and falls by one percentage point each year. During contract year 4 the owner withdraws $30,000 in excess of any free amount. What surrender charge applies?

• a.$1,200✓
• b.$1,500
• c.$2,100
• d.$900

The charge in year 4 is 7% - 3 points = 4%, so 4% x $30,000 = $1,200. The $1,500 figure applies the 5% rate of year 3. The $900 figure applies the 3% rate of year 5. The $2,100 figure applies the 7% first-year rate to the withdrawal.Costs and fees: annuity surrender charges

An adviser with discretion pays a broker a commission higher than another broker would have charged, in return for research. Under the Section 28(e) safe harbor, what must the adviser have determined in good faith?

• a.The broker charged the lowest commission available for that particular transaction in the market
• b.The commission was reasonable in relation to the value of the brokerage and research received✓
• c.Every client whose commissions paid for the research benefited from that particular research
• d.The client approved in writing the use of its commissions to pay for the research on each trade

Section 28(e) of the Exchange Act protects a money manager from a claim of breach of fiduciary duty for paying more than the lowest available commission if the manager determined in good faith that the amount was reasonable in relation to the value of the brokerage and research services provided, judged by either the particular transaction or the manager's overall responsibilities. It does not require the lowest rate, a per-client benefit or written approval of every trade.Costs and fees: soft dollars (Section 28(e))

A customer holds $80,000 in a fund whose total annual expense ratio is 0.85%, which includes a 0.25% 12b-1 fee. About how much does the fund cost her each year?

• a.$200
• b.$480
• c.$680✓
• d.$880

The expense ratio already includes the 12b-1 fee, so the annual cost is 0.85% x $80,000 = $680. The $880 figure adds the 12b-1 fee a second time (1.10%). The $480 figure leaves the 12b-1 fee out (0.60%). The $200 figure is the 12b-1 fee alone.Costs and fees: expense ratio and 12b-1 fees

A stock closed at $54, $51, $55, $53 and $56 over the last five trading days. What is its five-day simple moving average?

• a.$56.00
• b.$53.80✓
• c.$54.00
• d.$53.75

A simple moving average adds the closing prices and divides by the number of days: ($54 + $51 + $55 + $53 + $56) / 5 = $269 / 5 = $53.80. The $53.75 figure leaves out one of the days and divides by four. The $54.00 figure is the median close, not the average. The $56.00 figure is just the latest close.Technical analysis: moving averages

A chart shows three troughs with the middle one the deepest. Price then breaks up through the neckline on rising volume. How do technicians read this?

• a.As a bearish reversal of the earlier advance
• b.As a bullish reversal of the earlier decline✓
• c.As a trading range that carries no signal
• d.As a continuation of the earlier decline

Three troughs with a lower middle trough form an inverted head and shoulders, a bottoming pattern. A breakout above the neckline on rising volume confirms a reversal of the downtrend. A bearish reversal of an advance is the signal from the regular head and shoulders top. A continuation signal would come from a flag or pennant, not a rounded bottom with a breakout.Technical analysis: chart patterns (inverted head and shoulders)

A stock rallies to $60, falls back to $54, rallies again to $60 on lighter volume, and then falls below $54. What is the usual interpretation?

• a.A double bottom, a bullish reversal confirmed by the break below $54
• b.A rounding bottom, a sign that the earlier decline is ending
• c.A double top, a bearish reversal confirmed by the break below $54✓
• d.An ascending triangle, a continuation pattern pointing to further gains

Two failed attempts at the same high with a pullback between them form a double top. The pattern is confirmed when price falls below the trough, here $54, and it signals a reversal from an uptrend to a downtrend. A double bottom is the mirror image at a low, and an ascending triangle breaks out upward. A rounding bottom appears after a decline, not after repeated failures at a high.Technical analysis: chart patterns (double top)

The Dow Jones Industrial Average keeps making new highs while the advance/decline line trends lower. How do technicians read this?

• a.As a warning that the advance is narrowing and may be fading✓
• b.As a sign that the market is oversold and due for a bounce
• c.As confirmation that the advance is broad and likely to continue
• d.As evidence that short interest in the market is falling off

If the index rises while fewer stocks advance each day, the rally depends on a shrinking group of leaders. That negative divergence is a classic warning that the move may fail. Rising breadth would confirm the advance, an oversold reading would follow a decline, and the advance/decline line says nothing about short interest.Technical analysis: breadth and divergence

Under Dow Theory, the Dow Jones Industrial Average closes at a new high but the Transportation Average does not. How is this interpreted?

• a.As a confirmed primary uptrend led by the industrial average
• b.As a signal that a primary bear market has already begun
• c.As a lack of confirmation that casts doubt on the uptrend✓
• d.As a buy signal because transports lag behind new advances

Dow Theory holds that a primary trend is confirmed only when the Industrial and Transportation averages both reach new highs (or lows). A new high in one without the other is a non-confirmation and a caution that the trend may be weaker than it looks. It does not by itself prove a bear market, and lagging transports are not a buy signal.Technical analysis: Dow Theory

The put/call ratio on a stock index has jumped to an extremely high reading. How would a contrarian technician most likely view this?

• a.As a neutral sign, since put and call activity offset each other
• b.As a bearish sign, since heavy put buying reflects informed selling
• c.As a sign that the market is overbought and ready to reverse
• d.As a bullish sign, since extreme pessimism often comes before a rebound✓

A high put/call ratio means investors are buying many more puts than calls. Contrarians treat widespread, extreme pessimism as a sign that most of the selling is done, so they read it as bullish. The bearish reading is the non-contrarian view. Offsetting activity is not what a high ratio means, and a high ratio points to pessimism, not an overbought market.Market sentiment: put/call ratio

A stock has 3,000,000 shares sold short, a float of 20,000,000 shares, and average daily volume of 500,000 shares. What is its short interest ratio (days to cover)?

• a.15 days
• b.0.17 days
• c.6 days✓
• d.30 days

The short interest ratio is shares sold short divided by average daily volume: 3,000,000 / 500,000 = 6 days. The 0.17 figure inverts the division. The 15 figure confuses the 15% of float that is sold short with days. The 30 figure moves the decimal point in the volume. A high ratio means shorts would need many days of volume to cover, which contrarians treat as potential buying demand.Market sentiment: short interest ratio

According to the odd-lot theory, how should a technician react when odd-lot investors are heavy net buyers?

• a.Lean toward selling, since small investors are assumed to be wrong at turning points✓
• b.Lean toward buying, since small investors are assumed to lead the market
• c.Take no action, since odd lots are too small to move the market at all
• d.Lean toward buying, since odd-lot demand shows the market is undervalued

The odd-lot theory is a contrarian sentiment tool. It assumes the small investors who trade in odd lots (under 100 shares) tend to buy near tops and sell near bottoms, so heavy odd-lot buying is read as a sign to sell or be cautious. The options that treat their buying as informed or as a sign of value take the opposite, non-contrarian view.Market sentiment: odd-lot theory

A parent gives a child 100 shares when the shares have a cost basis of $20 per share and a market value of $50 per share. The child later sells them for $60 per share. What is the child's taxable gain?

• a.$6,000
• b.$4,000✓
• c.$3,000
• d.$1,000

For a gain, the donee takes over the donor's basis (carryover basis) of $20 per share. The gain is ($60 - $20) x 100 = $4,000. The $1,000 figure measures from the value at the date of the gift, $50. The $3,000 figure is the gain the parent had at the time of the gift. The $6,000 figure is the total sale proceeds, not the gain.Gift tax: donee's basis for gifts (gain)

A parent gives a child 200 shares with a cost basis of $50 per share when the market value is $35 per share. The child later sells them for $42 per share. What is the result of the sale?

• a.A loss of $3,000 is recognized
• b.No gain or loss is recognized✓
• c.A gain of $1,400 is recognized
• d.A loss of $1,600 is recognized

When the value at the date of the gift is below the donor's basis, the donee has a dual basis. The donor's $50 is used to figure a gain and the $35 value is used to figure a loss. A sale at $42 falls between the two, so there is neither gain nor loss. The $1,600 loss uses $50 and the $1,400 gain uses $35. The $3,000 loss is the drop in value at the time of the gift.Gift tax: donee's basis for gifts (dual basis)

In 2026 a married donor gives $30,000 cash to a friend, and her spouse consents to treat the gift as made half by each of them. The annual exclusion is $19,000. How much of the gift is taxable?

• a.$11,000, the amount over a single $19,000 exclusion
• b.$15,000, the amount treated as given by each spouse
• c.$30,000, the full gift, since it is more than $19,000
• d.None, since each spouse is treated as giving only $15,000✓

With gift splitting, each spouse is treated as giving $15,000. Each amount is under the $19,000 annual exclusion, so nothing is taxable and no lifetime exclusion is used. The $11,000 figure ignores the split and applies only one exclusion. The $15,000 figure forgets that each spouse has an exclusion. The $30,000 figure ignores the annual exclusion altogether.Gift tax: gift splitting

In 2026 a parent gives $25,000 in cash to each of her three children, with no gift splitting. The annual exclusion is $19,000 per recipient. How much of these gifts reduces her lifetime basic exclusion amount?

• a.$57,000
• b.$18,000✓
• c.$6,000
• d.$75,000

Each gift exceeds the annual exclusion by $25,000 - $19,000 = $6,000, and three children make 3 x $6,000 = $18,000. That amount uses up part of her lifetime exclusion, and no tax is due while the total stays below it. The $6,000 figure counts only one child. The $57,000 figure is the total of the exclusions. The $75,000 figure is the entire amount given.Gift and estate tax: annual and lifetime exclusions

A market-capitalization-weighted index holds only stock A ($75 billion in market value) and stock B ($25 billion). Stock A falls 10% and stock B rises 5%. What is the change in the index?

• a.A gain of 1.25%
• b.A decline of 6.25%✓
• c.A decline of 7.5%
• d.A decline of 2.5%

Weights follow market value: A is 75% and B is 25%. The change is 0.75 x (-10%) + 0.25 x (+5%) = -7.5% + 1.25% = -6.25%. The -2.5% figure averages the two moves as if they were weighted equally. The -7.5% figure counts only stock A. The +1.25% figure reverses the weights.Market indexes: market-capitalization weighting

What does the Cboe Volatility Index (VIX) measure?

• a.The ratio of put volume to call volume on S&P 500 options over 30 days
• b.The realized volatility of the S&P 500 over the prior 30 trading days
• c.The expected 30-day volatility of the S&P 500 implied by index option prices✓
• d.The dispersion of returns across individual S&P 500 stocks over 30 days

The VIX is a forward-looking measure. It is derived from the prices of S&P 500 index options and expresses the volatility the market expects over the next 30 days, which is why it is called the fear gauge. Realized volatility looks backward, the put/call ratio is a separate sentiment measure, and dispersion across stocks is not what the index calculates.Market indexes: volatility index

A manager runs a portfolio of small-capitalization U.S. stocks. Which index is the most appropriate benchmark?

• a.The S&P 500 Large Cap Index
• b.The Russell 2000 Index✓
• c.The Dow Jones Industrial Average
• d.The Russell 1000 Index

The Russell 2000 tracks smaller U.S. companies and is the standard small-cap benchmark. The Dow Jones Industrial Average holds 30 large companies, the Russell 1000 covers the large-cap segment, and the S&P 500 is a large-cap index.Market indexes: small-cap benchmark

A customer is short one XYZ 60 call and, in the same account, long one XYZ call of the same class. Under FINRA's definition of covered, which long call makes the short call covered?

• a.The long call with a 55 strike✓
• b.A long XYZ 55 put
• c.The long call with a 65 strike and the same expiration date
• d.A long XYZ 60 put

A short call is covered by a long call of the same class, unit for unit, only if the long call's strike is equal to or lower than the short call's strike. The 55 call qualifies because it would let the writer buy at or below the price at which the writer might be assigned. A higher strike leaves a gap that the writer could lose on, and a put does not protect a short call.FINRA Rule 2360(a)(10)

A customer is short one XYZ 50 put and, in the same account, long one XYZ put of the same class. Under FINRA's definition of covered, which long put makes the short put covered?

• a.The long put with a 45 strike and the same expiration date
• b.A long XYZ 50 call
• c.The long put with a 55 strike✓
• d.A long XYZ 55 call

A short put is covered when the account holds a long put of the same class, unit for unit, with a strike equal to or higher than the short put's strike. The 55 put lets the holder sell at a price at least as high as the strike at which the short put may be assigned. A lower strike would leave exposure, and calls do not cover a short put.FINRA Rule 2360(a)(10)

A standard stock option contract giving the right to buy 100 shares is adjusted for a 3-for-2 stock split so that it now covers 150 shares. For the purposes of the options rule, how many contracts does it count as?

• a.One and one-half contracts, because it now covers 150 shares
• b.Two contracts, since the share count rose above 100
• c.Zero contracts until the adjusted terms are re-listed
• d.One contract, for as long as it stays outstanding✓

A contract that granted the right to purchase or sell 100 shares when written continues to be treated as one contract throughout its life, even though adjustments for splits or stock dividends change the number of shares it covers.FINRA Rule 2360(a)(23)

XYZ January 50 calls and XYZ January 55 calls are best described as:

• a.The same class of options but different series✓
• b.Both the same class and the same series
• c.The same series of options but different classes
• d.Different classes and different series, since the strike and expiration both differ

A class is all options of the same type on the same underlying security, so both are calls on XYZ. A series also requires the same exercise price and expiration, and the strikes differ. This is why the two contracts are different series within one class.FINRA Rule 2360(a)(3) and (a)(30)

XYZ March 50 calls and XYZ March 50 puts are best described as:

• a.Different series of one class, differing only by expiration
• b.The same class, because the underlying security, strike and month match
• c.The same series, because the strike prices and the expiration dates match
• d.Different classes, because one is a call and the other is a put✓

A class of options consists of all contracts of the same type, put or call, covering the same underlying security. Calls and puts on the same stock are therefore different classes, and since a series sits inside a class they cannot be the same series either.FINRA Rule 2360(a)(3)

Under FINRA's options rule, which of the following is excluded from the definition of an option?

• a.A straddle
• b.A registered warrant✓
• c.A call on a listed stock
• d.A put on a listed stock

The definition covers any put, call, straddle or other option or privilege that is a security, but it excludes tender offers, registered warrants, rights, convertible securities and options written by the issuer of the underlying security. A straddle is a combination of a put and a call and remains within the definition.FINRA Rule 2360(a)(21)

What distinguishes a FLEX equity option from a standardized listed equity option?

• a.It is issued by the corporation whose stock underlies it, rather than by the OCC
• b.It cannot be exercised before expiration
• c.It is not issued or cleared by the OCC
• d.The parties may negotiate contract terms within the exchange's rules✓

A FLEX equity option is issued, or subject to issuance, by the OCC but lets the parties negotiate terms such as strike and expiration, consistent with exchange rules. It is not an OTC option cleared outside the OCC, and an option written by the underlying issuer would fall outside the options rule altogether.FINRA Rule 2360(a)(16)

An investor buys one XYZ 45 call for $3.50. At expiration, what stock price is the break-even point?

• a.$48.50✓
• b.$41.50
• c.$52.00
• d.$45.00

A call buyer recovers the premium only after the stock has risen above the strike by the amount paid, so the break-even is 45 + 3.50 = 48.50. Subtracting the premium gives the break-even for a put, and the strike alone is where the option merely turns in the money, not profitable.FINRA Rule 2360(a)(2), (a)(28)

An investor buys one XYZ 60 put for $4. What is the maximum possible gain on the position, ignoring commissions?

• a.$6,000
• b.$5,600✓
• c.$400
• d.Unlimited

The put's value is greatest if the stock falls to zero, when the put is worth the 60 strike per share. The premium paid is subtracted, so the gain is (60 - 4) x 100 = $5,600. The full strike ignores the cost, the premium is the maximum loss, and the gain is not unlimited because a stock cannot fall below zero.FINRA Rule 2360(a)(2), (a)(28)

An investor buys one XYZ 60 put for $4. At expiration, the position breaks even at a stock price of:

• a.$60
• b.$56✓
• c.$52
• d.$64

A put buyer needs the stock to fall below the strike by the premium paid, so the break-even is 60 - 4 = 56. Adding the premium is the call formula, and the strike by itself is only where the put begins to have intrinsic value.FINRA Rule 2360(a)(2), (a)(28)

An investor writes one uncovered XYZ 50 call for $2. What is the break-even stock price at expiration?

• a.$54
• b.$50
• c.$48
• d.$52✓

The writer keeps the 2 premium until the stock rises above the strike, and the premium offsets the first 2 of losses, so the break-even is 50 + 2 = 52. Subtracting the premium is the short put calculation, and the writer's potential loss above the break-even is unlimited.FINRA Rule 2360(a)(2), (a)(28)

An investor writes one uncovered XYZ 40 put for $3. What is the maximum possible loss, ignoring commissions?

• a.$4,000
• b.Unlimited
• c.$3,700✓
• d.$300

The loss is greatest if the stock goes to zero and the writer must buy it at the 40 strike. The premium received cushions that loss, so the maximum is (40 - 3) x 100 = $3,700. The full strike ignores the premium, the premium is the writer's maximum gain, and the loss is not unlimited because the stock cannot fall below zero.FINRA Rule 2360(a)(2), (a)(28)

An investor buys one XYZ 60 put for $6 and sells one XYZ 50 put for $2. What is the maximum loss on the spread?

• a.$1,000
• b.$200
• c.$400✓
• d.$600

The net debit is 6 - 2 = 4, and that is all the investor can lose if both puts expire worthless: $400. The spread width is the most the position can be worth, not the loss. The width less the debit is the maximum gain, and the short put premium alone leaves out the cost of the long put.FINRA Rule 2360(a)(2), (a)(28)

An investor sells one XYZ 50 call for $4 and buys one XYZ 55 call for $1. What is the maximum loss on the spread?

• a.$300
• b.$200✓
• c.$5,300
• d.$500

The net credit is 4 - 1 = 3. The loss is greatest when the stock is at or above 55, where the spread costs 5 per share, so the maximum loss is (5 - 3) x 100 = $200. The credit is the maximum gain, the width alone ignores the premium received, and the last figure confuses the break-even with a dollar loss.FINRA Rule 2360(a)(2), (a)(28)

An investor sells one XYZ 55 put for $4 and buys one XYZ 45 put for $1. What is the maximum gain on the spread?

• a.$400
• b.$700
• c.$1,000
• d.$300✓

The net credit is 4 - 1 = 3, and the investor keeps all of it if the stock finishes above 55: $300. The spread width is the maximum risk before the credit, the width less the credit is the maximum loss, and the short put premium alone ignores the cost of the protective put.FINRA Rule 2360(a)(2), (a)(28)

XYZ stock trades at $52. An XYZ 45 call trades at a premium of $8.5. What is the time value of the call?

• a.$8.50
• b.$7.00
• c.$15.50
• d.$1.50✓

Intrinsic value is the amount by which the stock exceeds the strike, 52 - 45 = 7. Time value is the premium less intrinsic value, 8.5 - 7 = 1.50. The 7.00 is the intrinsic value itself, and the full premium includes both components.FINRA Rule 2360(a)(2), (a)(28)