Series 7 options strategies, explained with the math

Options are on the Series 7: FINRA's exam page lists options among the products the exam assesses. This post is an educational walk through the standard payoff math. It is not investment advice, and it ignores commissions, taxes and early exercise.

Each contract below covers 100 shares, and prices are quoted per share.

The four basic positions

Long call (buyer). You pay a premium for the right to buy at the strike. Maximum loss is the premium paid. Breakeven is strike plus premium. Gain is unlimited as the stock rises.

Example: buy one 50 call for 3. Cost is $300. Breakeven is 53. At 60 at expiration, the call is worth $1,000, a gain of $700.

Short call (writer). You collect the premium and must sell at the strike if exercised. Maximum gain is the premium. Breakeven is strike plus premium. Loss is unlimited if uncovered.

Long put (buyer). You pay a premium for the right to sell at the strike. Maximum loss is the premium. Breakeven is strike minus premium. The maximum gain is the strike minus the premium, per share, as the stock can only fall to zero.

Example: buy one 40 put for 2. Breakeven is 38. Maximum gain is (40 - 2) x 100 = $3,800.

Short put (writer). You collect the premium and may have to buy at the strike. Maximum gain is the premium. Breakeven is strike minus premium. Maximum loss is strike minus premium, per share.

Two combinations worth knowing

Covered call. Own 100 shares and sell a call against them. The premium adds income and lowers your breakeven; the sold call caps the upside at the strike.

Example: buy stock at 48, sell a 50 call for 2. Breakeven is 46. Maximum gain is (50 - 48 + 2) x 100 = $400.

Protective put. Own the stock and buy a put. The put sets a floor on losses at the cost of the premium.

Example: buy stock at 48 and a 45 put for 1.50. Maximum loss is (48 - 45 + 1.50) x 100 = $450. Breakeven is 49.50.

Long straddle. Buy a call and a put at the same strike and expiration. You profit from a large move in either direction. Breakeven points are strike plus total premium and strike minus total premium. Maximum loss is the total premium.

Example: buy a 50 call for 3 and a 50 put for 2. Total premium 5. Breakevens are 45 and 55. Maximum loss is $500.

Memory aids that are just arithmetic

• Calls: breakeven is strike plus premium. Puts: strike minus premium.
• A buyer's loss is capped at the premium. A seller's gain is capped at the premium.
• A long option position and a short position on the same contract are mirror images: one side's gain is the other's loss.

Practice each formula until you can produce it without thinking, and keep some time for the yield math the exam also expects, such as in the bond yield calculator. For where options sit in the exam, read what the Series 7 covers and Series 7 vs SIE. An Encodr Series 7 course is in the works, described on the coming-soon page; you can also browse all exam prep courses.