SIE options basics with worked examples

Options look intimidating, but the SIE tests a small set of ideas over and over. Learn who has the right, who has the obligation, and how to compute breakeven and maximum loss, and you can handle most questions. Every example here comes from Encodr's SIE options unit.

The basic split: rights and obligations

An option is a contract between two people. The buyer (the holder) pays a price for a right. The seller (the writer) collects that price and takes on an obligation. Rights belong to holders, obligations belong to writers.

• A call gives its holder the right to buy the underlying at the strike price.
• A put gives its holder the right to sell the underlying at the strike price.
• The strike price is the set price per share at which the underlying is bought (call) or sold (put) if the option is exercised.
• The premium is the price the buyer pays the seller, quoted per share. It is not refundable if the option expires unused.

One standard equity contract covers 100 shares, so a premium of $2.20 costs $2.20 x 100 = $220. An "ABC December 70 Call" gives its holder the right to buy ABC at $70 per share before the December expiration.

Moneyness, intrinsic value and time value

• A call is in the money when the stock is above the strike, and a put is in the money when the stock is below the strike.
• An option is at the money when the strike equals the stock price.

Premium = intrinsic value + time value. Example: a call with a strike of 45 on a stock at 52 has intrinsic value 52 - 45 = 7.00. If the premium is 8.50, time value is 8.50 - 7.00 = 1.50.

An out-of-the-money option has no intrinsic value, so its whole premium is time value. A put with a strike of 30 on a stock at 34 and a premium of 0.90 has intrinsic value 0 and time value 0.90. Time value erodes toward zero as expiration approaches, and higher volatility generally raises premiums.

Breakeven, maximum gain and maximum loss for the four positions

Compute in per-share terms, then multiply by 100.

Long call (buyer). Breakeven = strike + premium. Strike 50, premium 3.00: 50 + 3 = 53. Maximum loss is the premium: 3.00 x 100 = $300. Profit is unlimited as the stock rises. At expiration with the stock at 58: (58 - 50 - 3.00) x 100 = $500.

Long put (buyer). Breakeven = strike - premium. Strike 50, premium 4.00: 50 - 4 = 46. Maximum loss is the premium. The profit is large but limited, because a stock can only fall to zero. A put buyer does not have unlimited profit.

Short call (writer). Maximum gain is the premium received. An uncovered (naked) call has unlimited loss potential, because the stock can keep rising.

Short put (writer). Maximum gain is the premium received. The loss is large but capped at (strike - premium) x 100, because the stock can only fall to zero. Example: strike 40, premium received 1.80: (40 - 1.80) x 100 = $3,820. Uncovered puts do not carry the unlimited-loss label. That belongs to the uncovered call.

Covered positions

• A covered call is owning the stock and selling a call against it. Buy at 48.00 and sell one 50 call for 2.00: breakeven is 48 - 2 = 46, and maximum gain is (50 - 48 + 2) x 100 = $400. Upside is capped at the strike, because the stock will be called away above it.
• A protective put is owning the stock and buying a put on it, so a decline is limited. Buy at 60.00 and buy a 58 put for 1.50: breakeven is 60 + 1.50 = 61.50, and maximum loss is (60 - 58 + 1.50) x 100 = $350.
• A cash-secured put is writing a put while holding cash equal to the strike x 100. For a 35 put, that is $3,500.

To cover calls, count 100 shares per contract: 300 shares cover at most 3 contracts. Try any of these positions in the options profit calculator.

Exercise and assignment

Exercise is the holder invoking the right to buy (call) or sell (put) at the strike. Assignment is notice to a writer that the obligation must be performed. Only the writer can be assigned, and the holder chooses whether to exercise.

• If a call writer is assigned, the writer sells at the strike. If a put writer is assigned, the writer buys at the strike.
• Net cost when a call is exercised: strike 40 plus premium paid 3.00 is 43 per share.
• Net proceeds when a put is exercised: strike 60 minus premium paid 4.00 is 56 per share.

A writer who wants to avoid assignment on a given day must buy back the short option before that day's market close. American-style options can be exercised any business day up to and including expiration, while European-style options can be exercised only on the expiration date. As of 2026, standard monthly equity options expire on the third Friday of the month. Options that expire out of the money are not exercised or assigned and expire worthless. Equity options settle by physical delivery of shares, while index options are cash settled.

The paperwork

The Options Clearing Corporation (OCC) clears and guarantees listed options. The Options Disclosure Document (ODD) must be delivered at or before account approval under FINRA Rule 2360.

Practice

Write the position out (who holds, who writes, call or put), then compute breakeven and maximum loss in per-share terms, then multiply by 100. That method covers most exam questions. The rest of the math is in SIE exam math: formulas with examples, and the content outline shows how options fit in the products section. Encodr's free FINRA SIE course has a full options unit with typed-answer calculation cards, so you produce the numbers instead of recognizing them.