Series 7 - General Securities Representative Exam

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A trader owns 7000 shares of BCDE corp. BCDE corp currently trades at $55 per share. The trader wants to earn income from this position but doesn't want to risk his whole position. He is willing to take a defined risk. Which strategy makes sense for this objective?

Buy 70 BCDE $50 puts
Sell 90 $60 BCDE calls
Sell 60 $60 BCDE calls
Sell 70 $40 BCDE puts


The correct answer is ( C ). The key words in the question are INCOME, DEFINED RISK, and not wanting to risk the whole position. Selling covered calls creates income for the trader. The risk is, if the price of the stock moves up through the strike price of the short calls before expiration, his stock could be called away. Selling quantity 90 calls is too much risk; 30 of them are naked. Buying puts will not produce income (it is a debit) and selling puts just adds to his already bullish position and is not part of the objective