Series-7 - Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records (73% of the exam) - Section 3.3

Apply listed options characteristics and strategies - protective puts, covered calls, spreads, and straddles - and compute maximum gain, maximum loss, and break-even for option positions.

Apply the contract specifications, exercise and assignment mechanics, and the role of the Options Clearing Corporation (OCC) for listed equity, index, and yield-based options. Compute the maximum gain, maximum loss, and break-even for basic and advanced strategies - protective puts, covered calls, debit and credit spreads, straddles, and uncovered writing - and apply the tax treatment of premiums, exercise, and expiration.

Options Clearing CorporationCovered callProtective putSpreadBreak-even point

Practice question for this objective

Free sampleProvides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Recordshard

Ms. Haddad writes 1 PQR June 25 call and receives a premium of 1.50 ($150). The call is uncovered. She asks her registered representative for her maximum gain, her maximum loss, and her break-even point on this position. Which summary is correct?

AMaximum gain is $150, maximum loss is unlimited, and break-even is 23.50.
BMaximum gain is $150, maximum loss is unlimited, and break-even is 26.50. Correct
CMaximum gain is unlimited, maximum loss is $150, and break-even is 26.50.
DMaximum gain is $150, maximum loss is $2,500, and break-even is 26.50.

For an uncovered short call, maximum gain equals the premium, maximum loss is unlimited, and break-even equals strike plus premium. A naked call writer earns only the premium but must deliver stock at the strike however high the price rises, so the loss is unbounded and break-even occurs once the stock exceeds the strike by the premium received.

Why A is wrong: The break-even of 23.50 subtracts the premium from the strike, which is the long put method; a call break-even adds the premium, so the writer starts losing above 26.50.

Why B is correct: The writer keeps the $150 premium as the maximum gain; the loss is unlimited because the stock has no ceiling and the call is uncovered; and break-even is strike plus premium (25 + 1.50 = 26.50).

Why C is wrong: Unlimited gain with a $150 loss describes the long call buyer; the writer's gain is capped at the $150 premium while the loss is unlimited as the stock rises.

Why D is wrong: The loss is not capped at $2,500; a naked call writer must deliver at 25 no matter how high the stock climbs, so the potential loss is unlimited.

See more Series-7 practice questions, answers explained.

Exam traps in Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records

Answers that look right on this material and are not. Each one is a distractor from a different question in the Series-7 bank for this domain.

Maximum loss is $400, break-even is 66, and maximum gain is unlimited.
Why it is wrong: The 66 figure subtracts the premium from the strike, which is the break-even method for a long put; a long call adds the premium to the strike, so the correct break-even is 74.
Maximum gain is unlimited, maximum loss is $300, and break-even is 47.
Why it is wrong: A long put profits as the stock falls, but the stock cannot go below zero, so the gain is capped at the strike less the premium, not unlimited.
Maximum gain is $300, maximum loss is unlimited, and break-even is 37.
Why it is wrong: Unlimited loss belongs to a short call writer; a stock cannot fall below zero, so the put writer's loss is capped at the strike less the premium, or $3,700.

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