Introduction

Options Fundamentals covers the foundation for everything you need to know about options on the Series 7 exam.

Exam Weight: Part of 73% Function 3 (~20 questions estimated for the Options chapter)

Video Resources

Live 1-on-1 tutoring with Dean Tinney ↗

What You'll Learn

In this unit, you'll cover:

  • Listed Options and Their Characteristics: Call and put definitions, contract specifications, strike prices, expiration, and how stock splits and dividends adjust contracts
  • The Options Clearing Corporation (OCC): The issuer and guarantor of all listed options, exercise and assignment mechanics, and the Options Disclosure Document (ODD)
  • Opening and Closing Transactions: Buy to open, sell to close, and the three ways an option position ends
  • Options Values: Premium, intrinsic value, time value, and moneyness (ITM, ATM, OTM)
  • Volume and Open Interest: How trading activity and outstanding positions are measured
  • Position Limits and Exercise Limits: Maximum contract caps on the same side of the market
  • American-Style vs. European-Style Options: Exercise timing, settlement differences, and which products use each style
  • LEAPS: Long-term options with expirations beyond one year
  • Dividends and Their Effect on Options: How ex-dividend dates impact premiums and trigger early exercise
  • Non-Equity Options: Foreign currency options and yield-based (interest rate) options
  • Options Account Approval and Regulations: FINRA Rule 2360, the ODD, approval levels, and pre-ODD communications

Why This Matters

Options are one of the most heavily tested topics on the Series 7 exam. This chapter alone accounts for an estimated 20 questions, roughly 16% of scored items. The exam goes beyond definitions and tests your ability to:

  • Calculate intrinsic value and time value
  • Determine moneyness (ITM, ATM, OTM)
  • Identify which contract adjustments apply after splits and dividends
  • Understand the regulatory framework for opening and maintaining options accounts

You need these fundamentals down cold before moving on to strategies, spreads, and options taxation in the next three units.

Let's start with the building blocks: what calls and puts are, how contracts are structured, and what happens when stocks split.