Options Strategies

Calls and Puts

• A call gives the holder the right to buy 100 shares at the strike price; a put gives the holder the right to sell 100 shares at the strike price.
• Buyers pay a premium and have limited risk equal to the premium paid. Writers receive premium and take on obligation if assigned.
• Intrinsic value for a call = market price - strike, if positive. Intrinsic value for a put = strike - market price, if positive. Time value = premium - intrinsic value.

Core Strategies

• Long call: bullish, unlimited upside, max loss = premium.
• Long put: bearish, substantial upside as stock falls, max loss = premium.
• Covered call: long stock + short call, generates income and partial downside cushion, but caps upside at strike plus premium.
• Protective put: long stock + long put, establishes a floor under the position.
• Spreads combine long and short options of same class. Debit spreads generally seek widened value; credit spreads seek narrowing or expiration advantage.

Breakeven Formulas

• Long call breakeven = strike + premium.
• Long put breakeven = strike - premium.
• Covered call breakeven = stock purchase price - premium received.
• Protective put breakeven = stock cost + put premium.

Series 7 focus

• Distinguish hedging from speculation, and know when an option is in, at, or out of the money. American-style equity options can be exercised any time before expiration. Index options are cash-settled and may have European exercise features.
• Suitability questions often test whether the client wants income, protection, or leverage, and whether the recommendation limits or expands risk.