Introduction

Welcome to Basic Options Strategies, where you move from understanding individual options to combining them with stock positions for income, hedging, and risk management.

Exam Weight: Part of 73% (~20 questions est. for the Options chapter)

What You'll Learn

In this unit, you'll cover:

• Covered Call Writing: Selling calls against stock you own for income generation
• Covered Put Writing: The mirror-image strategy for short sellers
• Protective Puts (Equity): Using puts as insurance to fully hedge a long stock position
• Protective Puts (Index): Hedging an entire portfolio with cash-settled index options
• Foreign Currency Options: Hedging exchange rate risk for exporters, importers, and investors
• Yield-Based (Interest Rate) Options: The counterintuitive hedge that trips up most test-takers
• Single Option Economics: Max gain, max loss, and break-even for all four basic positions
• Profit and Loss (P&L) Calculations: The T-chart method for computing profit and loss on combined positions
• Full vs. Partial Hedges: When to buy vs. sell options for protection

Why This Matters

Options strategies are among the most frequently tested topics on the Series 7. The exam expects you to calculate break-evens, determine maximum gain and loss, choose the right hedge for a given scenario, and spot common traps, especially around yield-based options and the difference between full and partial hedges. These basic strategies are the foundation for the spreads and straddles covered in the next unit.

Let's start with covered call writing, the most common options strategy you'll encounter on the exam.