Options Practice Questions for the SIE

Answer: Selling an uncovered XYZ call

The uncovered (naked) call writer has an OBLIGATION to sell stock at the strike no matter how high the market climbs, and since there is no ceiling on a stock's price, the potential loss is unlimited — this is the standard 'riskiest option position.' Choices A and B are traps for anyone who flips buyer and writer: buyers hold rights, not obligations, so their maximum loss is always just the premium paid. Choice D is the deliberate near-miss — many candidates believe a short put is also 'unlimited,' but a stock stops at zero, so the naked put writer's worst case is strike minus premium (times 100 shares). Map every position on the 2×2 grid: buy call / buy put = right, premium at risk; sell call / sell put = obligation, with only the naked CALL open-ended. Source: OCC's options disclosure document, 'Characteristics and Risks of Standardized Options' (ODD); FINRA SIE content outline, Section 2 (options).

The Trap: Believing a short (uncovered) put also carries unlimited loss — the stock can only fall to zero, so the naked put's loss is large but capped at strike − premium.

• Buying an XYZ put: Long put vs. short call blur (spec's flagship options confusion pair): both are bearish, but only the short call carries unlimited risk. The put buyer's loss is capped at the premium.
• Buying an XYZ call: Buyer/writer flip misconception: an option BUYER can never lose more than the premium paid. Students who flip the buyer's limited risk with the writer's open-ended exposure land here.
• Selling an uncovered XYZ put: The documented 'short put has unlimited loss' trap: the loss is large but LIMITED, because the stock cannot fall below zero — max loss = (strike − premium) × 100.

Verified against: 'short put max loss is NOT unlimited' pair); FINRA SIE outline 2.1 options

Answer: $4,600

Use the 'call up, put down' breakeven device: a put's breakeven is strike minus premium, here 50 − 4 = 46. The best case for a put buyer is the stock going to zero, so the maximum gain is the breakeven carried all the way down: 46 points × 100 shares = $4,600. Choice A confuses the two sides of the zero-sum contract — $400 (the premium) is the buyer's max LOSS and the writer's max GAIN, a flip the exam loves to punish. Choice C forgets the sunk premium: you cannot pocket the full $5,000 strike value when you paid $400 for the right. Choice D transplants the long call's unlimited upside onto a put — impossible, since stock prices stop at zero. A T-chart (premium out: $400; exercise proceeds if stock hits zero: $5,000 in) solves this mechanically. Source: OCC's ODD ('Characteristics and Risks of Standardized Options'); FINRA SIE content outline, Section 2 (options positions and payoffs).

The Trap: Treating a long put's maximum gain as unlimited, or flipping it with the $400 premium (which is the buyer's max loss and the writer's max gain).

• $5,000: Premium-ignored trap (the ITM ≠ profitable family): $5,000 is the full strike value, forgetting that the $400 premium paid must be subtracted from any gain.
• Unlimited: Only a long CALL has unlimited gain potential, because a stock can rise without limit. A put's gain is capped because the stock cannot trade below zero.
• $400: Buyer/writer flip: $400 is the buyer's maximum LOSS (the premium) and simultaneously the WRITER's maximum gain. Students who scramble the zero-sum table pick this.

Verified against: premium-ignored trap); FINRA SIE outline 2.1 options

Answer: $400

A protective put works like an insurance policy with a deductible: the formula is max loss = stock cost − strike price + premium paid. Walk the worst case: QRS craters, the investor exercises and sells at the $50 strike, losing $2 per share on the stock (bought at 52), plus the $2-per-share premium — $4 × 100 = $400. Choice A is the over-trusting version of the insurance analogy (the floor sits BELOW cost, and the premium is never recovered); Choice B prices only the put and forgets the stock leg; Choice D forgets the hedge exists at all. For full command of the position, note the upside too: breakeven is $54 (stock cost + premium), and gains above that are unlimited — the put costs performance but never caps it. Contrast with the covered call, which generates income but protects the downside only by the premium received. Source: OCC's ODD ('Characteristics and Risks of Standardized Options'); FINRA SIE content outline, Section 2 (hedging strategies — protective puts).

The Trap: Pricing the hedge wrong: either treating the put as total insurance ($0 loss) or as a standalone position ($200 premium only), instead of computing stock cost − strike + premium.

• $0, because the put fully insures the stock: Insurance analogy taken too literally: protection begins only at the $50 strike (below the $52 cost), and the $200 premium is a sunk cost — 'insurance' always has a deductible and a price.
• $200: Standalone-put framing: $200 (the premium) would be the max loss of a naked long put, but it ignores the $2-per-share of stock exposure between the $52 cost and the $50 floor.
• $5,400: Total-outlay trap: stock cost plus premium ($5,200 + $200) assumes the whole investment is at risk, ignoring that the put guarantees the right to sell at $50 no matter how far QRS falls.

Verified against: FINRA SIE outline 2.1 options

Answer: 100 shares; total cost of $350

A standard listed equity option contract represents 100 shares of the underlying stock, and premiums are always quoted on a per-share basis — so the investor's total cost is the quoted premium multiplied by 100 shares: $3.50 × 100 = $350. Choice B forgets to apply that multiplier and treats the quote itself as the total price. Choice C mistakes the contract for a single share of stock. Choice D uses the wrong multiplier entirely. Getting the contract size and premium-quoting convention right is the foundation for every other options calculation on the exam, from breakeven to profit/loss.

• 1 share; total cost of $3.50: Embodies the misconception that an option contract represents a single share like a stock certificate, rather than the standard 100-share multiplier.
• 100 shares; total cost of $3.50: Embodies the misconception that the quoted premium already represents the full contract cost, forgetting that premiums are quoted per share and must be multiplied by the 100-share contract size.
• 1,000 shares; total cost of $3,500: Embodies a wrong-multiplier misconception, mistaking the 100-share standard contract size for a 1,000-share size.

Verified against: Standard OCC-issued equity option contract specifications (100-share multiplier; per-share premium quoting)

Answer: The buyer has the right, but not the obligation, to exercise the contract; the writer has the obligation to perform if assigned

This right-versus-obligation asymmetry is the core structure of every option contract: the buyer pays a premium for the right to exercise (buy stock, for a call, or sell stock, for a put), while the writer collects that premium in exchange for the obligation to perform if the buyer chooses to exercise and the writer is assigned. Choice A reverses this relationship. Choice C wrongly gives the writer a right to exercise — only the long side of the contract makes that decision. Choice D overlooks that the writer's obligation persists as long as the contract is open, not just at the moment the premium is collected.

• The buyer has an obligation to exercise the contract, while the writer has the right to be assigned: Embodies the classic reversal of the right-vs-obligation relationship — it is the buyer who holds the right, and the writer who bears the obligation, not the other way around.
• Neither party has any obligation once the premium changes hands: Ignores the writer's ongoing obligation to perform if assigned, which exists for the life of the contract regardless of the premium already having been paid.
• Both the buyer and the writer have the right to exercise the contract at any time: Embodies the misconception that either side can choose to exercise; only the long (buyer) decides whether and when to exercise — the writer simply waits to see if assigned.

Verified against: Standard options contract structure — buyer's right vs. writer's obligation

Answer: $7 profit

For a long call, breakeven equals strike price plus premium paid: $50 + $4 = $54 (the familiar 'call up' rule — add the premium to the strike). At expiration with the stock at $61, the option is $11 in-the-money, but the investor already spent $4 to buy it, so net profit is $11 − $4 = $7 per share. Choice B is the exam's favorite trap: an option can be deeply in-the-money and still not deliver profit equal to its full intrinsic value once the premium cost is factored in. Choice C ignores that $61 is comfortably above the $54 breakeven. Choice D substitutes the stock's price for the option position's actual gain.

• $11 profit: Embodies the trap of treating the option's intrinsic (in-the-money) value at expiration as the net profit, forgetting to subtract the premium originally paid — confusing 'in-the-money' with 'profitable by that full amount.'
• $4 loss: Misreads the scenario as unprofitable even though the stock price ($61) is well above the breakeven point ($54).
• $61 profit: Confuses the stock's market price itself with the profit generated by the option position.

Verified against: Long call breakeven = strike + premium; maximum gain is unlimited above breakeven

Answer: $37 per share, because the stock can fall to zero but no lower

A stock's price has a floor at zero, so the worst-case loss for a put writer is calculable, not open-ended: strike price minus premium received, or $40 − $3 = $37 per share. This is one of the SIE's classic traps — students often assume any 'short' options position must carry unlimited risk, but that logic applies to short stock and short (uncovered) calls, not short puts, because there is a floor on how far a stock can decline. Choice A misapplies the unlimited-risk idea to a position that actually has a defined, if large, maximum loss. Choice B mistakenly reports the writer's maximum gain instead of the maximum loss. Choice D forgets to credit the premium already collected against the loss.

• Unlimited, because the stock price could theoretically fall forever: Embodies the classic trap of assuming every short options position carries unlimited risk, as if it were a short stock or short call position; a stock's price cannot fall below zero.
• $3 per share, limited to the premium received: Confuses the writer's maximum gain (the premium received if the put expires worthless) with the writer's maximum loss, which is much larger.
• $40 per share, the full strike price with no offset for the premium received: Forgets that the premium already collected by the writer reduces the ultimate loss below the full strike price.

Verified against: Short put maximum loss = strike price − premium received (loss capped because stock price floor is zero)

Answer: $400 loss — the $8-per-share difference between strike and market price, less the $4 premium collected

As the writer of an uncovered put, this investor is obligated to buy the stock at the $55 strike if assigned, even though the market has fallen to $47 — an $8-per-share loss on the forced purchase. The $4-per-share premium already collected offsets part of that loss, leaving a net loss of $8 − $4 = $4 per share, or $400 on the one contract (100 shares). Option B forgets to credit the premium already collected, overstating the loss. Option C mislabels the outcome as a gain, incorrectly assuming the collected premium is pure profit regardless of the loss taken on the stock after assignment. Option D applies the short call's unlimited-risk profile to a short put — a frequently tested mix-up: a short put's maximum loss is large but not unlimited, because the underlying stock can only fall to zero, whereas a short (uncovered) call's risk is genuinely unlimited since a stock's price has no ceiling.

The Trap: Short put's capped max loss confused with a short call's unlimited risk

• $800 loss — the full $8-per-share difference between strike and market price, without crediting the premium collected: Misconception: forgets to credit the premium already collected, which offsets part of the assignment loss.
• $400 gain — treating the premium collected as the final outcome without adjusting for the stock's decline below the strike: Misconception: assumes the premium is pure profit regardless of what happens after assignment, ignoring the loss on buying stock above its market value.
• Unlimited loss, because the investor is short an uncovered option: Misconception: applies the short call's unlimited-risk profile to a short put; a short put's loss is large but capped, since the underlying stock can only fall to zero.

Verified against: loss = strike − premium) and L119 (short put max loss is NOT unlimited — classic trap)

Answer: Breakeven = $636; maximum loss = $63,600 if COST stock falls to $0 before expiration, since the writer must buy stock at $650 per share, offset only by the $14 premium already collected.

For a short put, breakeven is the same number as it would be for the put's buyer: strike minus premium, or $650 − $14 = $636. Because the stock can fall no lower than $0, the writer's worst case is being forced to buy stock at $650 that is now worthless, offset only by the $14 premium already collected — a maximum loss of $636 per share, or $63,600 on this one-contract (100-share) position. Option B both reverses the breakeven formula (adding the premium to the strike, as with a call) and wrongly claims unlimited loss, which describes an uncovered call writer, not a put writer — a stock's price floor of zero caps the put writer's loss. Option C confuses the writer's maximum gain (the $1,400 premium, kept if the stock stays above the strike at expiration) with the maximum loss. Option D gets the correct breakeven but understates the maximum loss, ignoring that the full strike-minus-premium amount is at risk if the stock falls all the way to zero, not just the premium amount.

The Trap: short put loss mistaken as unlimited (confused with short call) or breakeven formula reversed

• Breakeven = $664; maximum loss is unlimited, since the writer has an open-ended obligation to buy stock at any price.: Reverses the breakeven formula (as used for a call) and wrongly claims unlimited loss, which describes an uncovered call writer, not a put writer.
• Breakeven = $636; maximum loss = $14 per share only, since the option cannot be exercised below the strike price.: Gets breakeven right but understates maximum loss, ignoring that the full strike-minus-premium amount is at risk, not just the premium.
• Breakeven = $650; maximum loss = $1,400, limited to the premium received.: Confuses the writer's maximum gain (the premium, $1,400) with the maximum loss.

Verified against: Short put breakeven and maximum loss — standard options risk/reward mechanics

Answer: It generates premium income, offsets losses only up to the amount of the premium received, and caps the position's upside above the strike price plus premium

Writing a covered call brings in premium income and provides a cushion against a stock price decline — but only up to the size of the premium received. Below that cushion, the covered call writer loses dollar-for-dollar right alongside an unhedged shareholder, which is why this strategy is not the same as buying insurance. In exchange for that limited cushion, the investor caps the position's upside at the strike price plus the premium collected, because a rise above the strike will likely result in assignment and the obligation to sell at that fixed price. Choices A and C both overstate the protection as complete or guaranteed, which contradicts the strategy's actual, premium-limited nature. Choice B is wrong on both the downside and upside claims.

• It removes all downside risk while preserving unlimited upside potential: Incorrect on both counts — downside protection is limited to the premium amount, and upside is capped once the stock rises above the strike.
• It fully protects the stock position from any decline in price, similar to a protective put: Embodies the widespread misconception that a covered call functions like insurance; it only cushions losses up to the premium collected, not fully.
• It guarantees the investor a profit even if the stock price falls sharply: Embodies a guarantee misconception; a sharp decline beyond the premium cushion still produces a net loss for the covered call writer.

Verified against: Covered call income strategy: premium cushion limited to premium amount; caps upside at strike + premium