SIE Exam: Options
Section 2 — Understanding Products and Their Risks (44% of exam)
Options are derivative contracts that give the holder the right to buy or sell an underlying security at a specified price before a set expiration date. This is one of the most heavily tested product topics on the SIE exam. You must understand call options (right to buy) and put options (right to sell), along with the obligations of writers (sellers). The option premium consists of intrinsic value and time value — calculating these components is essential. You need to know how to determine breakeven points for both long calls (strike plus premium) and long puts (strike minus premium), as well as maximum gain and maximum loss for each position. Common strategies tested include covered calls, protective puts, long straddles, and spreads. The exam covers the Options Clearing Corporation (OCC) as the guarantor of all listed options, the requirement to provide the Options Disclosure Document (ODD) before account approval, and settlement at T+1 for equity options. Index options and their cash settlement feature are also tested. Understanding in-the-money, at-the-money, and out-of-the-money status for both calls and puts is fundamental to every options question on the SIE.
Key Concepts
Call Option
Gives the buyer the right to purchase 100 shares of the underlying stock at the strike price before expiration. The buyer pays a premium; the writer receives it.
Put Option
Gives the buyer the right to sell 100 shares at the strike price before expiration. Put buyers profit when the stock price falls below the strike price minus the premium.
Intrinsic Value and Time Value
An option's premium equals intrinsic value (the in-the-money amount) plus time value (the additional premium reflecting time remaining and volatility).
Covered Call
Writing a call option on stock the investor already owns. Generates income from the premium but limits upside if the stock rises above the strike price.
Protective Put
Buying a put option on stock already owned to provide downside protection. Acts like insurance, guaranteeing a minimum sale price at the strike.
Options Clearing Corporation (OCC)
The issuer and guarantor of all listed options contracts. Acts as counterparty to both sides of every trade, ensuring contract obligations are fulfilled.
Options Disclosure Document (ODD)
Must be provided to customers at or before account approval for options trading. Contains information about risks and characteristics of standardized options.
Practice Questions
Question 1 of 4
An investor buys a call option with a strike price of $50 and pays a premium of $3.50. What is the breakeven point?
Question 2 of 4
What is the maximum loss for the writer of an uncovered (naked) call option?
Question 3 of 4
A stock is trading at $67. A call option with a strike price of $60 is trading at $9.50. What is the time value of this option?
Question 4 of 4
Index options differ from equity options in that index options are typically settled by:
14+ more practice questions
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Start Practicing FreeFrequently Asked Questions
How are options tested on the SIE exam?
The SIE tests options fundamentals: calls vs. puts, buyer rights vs. writer obligations, intrinsic and time value, breakeven calculations, maximum gain/loss, and common strategies like covered calls and protective puts. You also need to know the OCC's role and the ODD requirement.
How do I calculate breakeven for options on the SIE?
For a long call, breakeven is the strike price plus the premium paid. For a long put, breakeven is the strike price minus the premium paid. For short (written) positions, the breakeven is the same price, but profit and loss are reversed.
What is the difference between a covered call and a naked call?
A covered call writer owns the underlying stock, limiting risk because they can deliver shares if assigned. A naked (uncovered) call writer does not own the stock and faces theoretically unlimited loss if the stock price rises sharply.