Question 1

What is the maximum loss for a buyer of a call option?

Accepted Answer

The maximum loss is the premium paid. The buyer can lose no more than the cost of purchasing the option.

Question 2

What is the maximum gain for a seller (writer) of a put option?

Accepted Answer

The maximum gain is the premium received. The writer keeps the full premium if the option expires worthless.

Question 3

What is the breakeven point for a long call option?

Accepted Answer

Breakeven = Strike Price + Premium Paid. The stock must rise above this level for the buyer to profit.

Question 4

What is the breakeven point for a long put option?

Accepted Answer

Breakeven = Strike Price – Premium Paid. The stock must fall below this level for the buyer to profit.

Question 5

What is the maximum loss for a seller (writer) of an uncovered (naked) call option?

Accepted Answer

Unlimited. Because there is no cap on how high a stock's price can rise, the naked call writer faces theoretically unlimited loss.

Options Strategies – Series 7 Exam Prep

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