Chapter 9: Options Intermediate Test: Hedging & Income

Question 1

An investor buys 100 XYZ at 50 and buys 1 XYZ 45 put for 3.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 1

Type: Protective Put (Full Hedge)

Max Gain: Unlimited
Calculation:
Long stock has no upside cap. The put only protects the downside; it does not limit gains.

Max Loss: $800
Calculation:
Stock loss down to strike: 50 − 45 = 5 points = $500
Plus premium paid: 3 points = $300
Total max loss = 5 + 3 = $800

Breakeven: 53
Calculation:
Stock cost + premium = 50 + 3 = 53

Series 7 FINRA Rationale:
This is the classic “insurance” structure: long stock + long put. FINRA wants you to recognize that the put sets a floor at the strike, but the investor still pays for that protection via the premium. The key pattern:
• Max loss = (Stock price − Put strike) + Premium
• Breakeven = Stock price + Premium
• Max gain = Unlimited
The trap is forgetting to add the premium to the stock loss when computing max loss, or forgetting that breakeven moves up, not down, because the premium increases cost basis.

Question 2

An investor buys 100 RST at 53 and buys 1 RST 50 put for 2.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 2

Type: Protective Put (Full Hedge)

Max Gain: Unlimited

Max Loss: $500
Calculation:
Stock loss down to strike: 53 − 50 = 3 points = $300
Plus premium paid: 2 points = $200
Total max loss = 3 + 2 = $500

Breakeven: 55
Calculation:
53 + 2 = 55

Series 7 FINRA Rationale:
This mirrors the textbook example you quoted. FINRA uses it to test whether you can combine stock loss and premium correctly. The concept: the put “locks in” a minimum sale price, but the investor still loses the difference between purchase price and strike, plus the cost of the hedge. The trap is to forget the premium or to think the put eliminates all loss. It doesn’t—it limits it.

Question 3

A customer buys 100 LMN at 72 and buys 1 LMN 70 put for 4.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 3

Type: Protective Put (Full Hedge)

Max Gain: Unlimited

Max Loss: $600
Calculation:
Stock loss down to strike: 72 − 70 = 2 points = $200
Plus premium paid: 4 points = $400
Total max loss = 2 + 4 = $600

Breakeven: 76
Calculation:
72 + 4 = 76

Series 7 FINRA Rationale:
Here FINRA is testing whether you remember that protective puts raise breakeven. Many candidates instinctively subtract the premium because they’re used to covered calls. That’s the trap. For long stock + long put, the premium is an added cost, so breakeven is higher than the stock purchase price.

Question 4

An investor buys 100 DEF at 65 and buys 1 DEF 60 put for 3.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 4

Type: Protective Put (Full Hedge)

Max Gain: Unlimited

Max Loss: $800
Calculation:
Stock loss down to strike: 65 − 60 = 5 points = $500
Plus premium paid: 3 points = $300
Total max loss = 5 + 3 = $800

Breakeven: 68
Calculation:
65 + 3 = 68

Series 7 FINRA Rationale:
FINRA wants you to see the symmetry: the further the strike is below the stock price, the more stock loss you can take before the put kicks in. Add the premium on top of that. The pattern is consistent: max loss = (stock − strike) + premium; breakeven = stock + premium; max gain = unlimited. Recognizing these patterns is how you move fast on exam day.

Question 5

An investor buys 100 RST at 53 and writes 1 RST 55 call at 2.

Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 5

Type: Covered Call (Long Stock + Short Call = Partial Hedge + Income)

Max Gain: $400
Calculation:
Stock gain if called: 55 − 53 = 2 points = $200
Plus premium received: 2 points = $200
Total max gain = 2 + 2 = $400

Max Loss: $5,100
Calculation:
If stock goes to 0: loss on stock = 53 points = $5,300
Less premium received: 2 points = $200
Net max loss = 53 − 2 = 51 points = $5,100

Breakeven: 51
Calculation:
Stock cost − premium = 53 − 2 = 51

Series 7 FINRA Rationale:
Covered calls are “partial hedges.” FINRA wants you to know that the premium cushions the downside slightly but does not fully protect the stock. The key pattern:
• Max gain = (Call strike − Stock cost) + Premium
• Max loss ≈ Stock cost − Premium (if stock goes to 0)
• Breakeven = Stock cost − Premium
The trap is thinking covered calls are fully hedged like protective puts—they’re not. Downside is still large.

PARTIAL HEDGE of downside risk:
• The short call premium gives some downside cushion.
• But it does not protect against a major drop.
• Upside is capped, downside is still largely exposed.
• Therefore: income strategy + partial hedge (but FINRA classifies it primarily as income).

Question 6

A customer buys 100 XYZ at 40 and writes 1 XYZ 42 call at 3.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 6

Type: Covered Call (Long Stock + Short Call = Partial Hedge + Income)

Max Gain: $500
Calculation:
Stock gain if called: 42 − 40 = 2 points = $200
Plus premium received: 3 points = $300
Total max gain = 2 + 3 = $500

Max Loss: $3,700
Calculation:
If stock goes to 0: loss on stock = 40 points = $4,000
Less premium received: 3 points = $300
Net max loss = 40 − 3 = 37 points = $3,700

Breakeven: 37
Calculation:
40 − 3 = 37

Series 7 FINRA Rationale:
FINRA uses covered calls to test whether you understand that the premium reduces cost basis and therefore lowers breakeven. The trap is to forget that the stock can still go to zero. The position is “covered” from an options perspective (no naked call risk), but not fully hedged from a stock perspective.

PARTIAL HEDGE of downside risk:
• The short call premium gives some downside cushion.
• But it does not protect against a major drop.
• Upside is capped, downside is still largely exposed.
• Therefore: income strategy + partial hedge (but FINRA classifies it primarily as income).

Question 7

A customer buys 100 ABC at 60 and writes 1 ABC 60 call at 4.

Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 7

Type: Covered Call (Long Stock + Short Call = Partial Hedge + Income)

Max Gain: $400
Calculation:
If called at 60: stock gain = 0 (bought at 60, sold at 60)
Premium received = 4 points = $400
Total max gain = $400

Max Loss: $5,600
Calculation:
If stock goes to 0: loss on stock = 60 points = $6,000
Less premium received: 4 points = $400
Net max loss = 60 − 4 = 56 points = $5,600

Breakeven: 56
Calculation:
60 − 4 = 56

Series 7 FINRA Rationale:
This is a “buy-write at the money.” FINRA likes this because it forces you to see that all upside beyond the premium is gone—any stock appreciation above 60 is surrendered when the call is exercised. The trap is to think there’s more upside than the premium. There isn’t. Upside is capped at the premium when the call strike equals the stock price.

PARTIAL HEDGE of downside risk:
• The short call premium gives some downside cushion.
• But it does not protect against a major drop.
• Upside is capped, downside is still largely exposed.
• Therefore: income strategy + partial hedge (but FINRA classifies it primarily as income).

Question 8

A customer buys 100 LMN at 50 and writes 1 LMN 55 call at 2.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 8

Type: Covered Call (Long Stock + Short Call = Partial Hedge + Income)

Max Gain: $700
Calculation:
Stock gain if called: 55 − 50 = 5 points = $500
Plus premium received: 2 points = $200
Total max gain = 5 + 2 = $700

Max Loss: $4,800
Calculation:
If stock goes to 0: loss on stock = 50 points = $5,000
Less premium received: 2 points = $200
Net max loss = 50 − 2 = 48 points = $4,800

Breakeven: 48
Calculation:
50 − 2 = 48

Series 7 FINRA Rationale:
This is a classic bullish‑but‑not‑too‑bullish strategy. FINRA wants you to see that the investor is willing to cap upside in exchange for immediate income (the premium). The pattern is the same: breakeven = stock − premium; max gain = (strike − stock) + premium; max loss ≈ stock − premium. The trap is confusing this with a protective put and thinking downside is limited. It’s not.

PARTIAL HEDGE of downside risk:
• The short call premium gives some downside cushion.
• But it does not protect against a major drop.
• Upside is capped, downside is still largely exposed.
• Therefore: income strategy + partial hedge (but FINRA classifies it primarily as income).

Question 9

A customer buys 100 DEF at 72 and writes 1 DEF 70 call at 5.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 9

Type: Covered Call (Long Stock + Short Call = Partial Hedge + Income)

Max Gain: $300
Calculation:
If called at 70: stock loss = 70 − 72 = −2 points = −$200
Plus premium received: 5 points = $500
Net = −2 + 5 = 3 points = $300

Max Loss: $6,700
Calculation:
If stock goes to 0: loss on stock = 72 points = $7,200
Less premium received: 5 points = $500
Net max loss = 72 − 5 = 67 points = $6,700

Breakeven: 67
Calculation:
72 − 5 = 67

Series 7 FINRA Rationale:
Here the call strike is below the stock price (an in‑the‑money covered call). FINRA uses this to see if you can handle a situation where the investor locks in a small net gain but sacrifices more upside and still has big downside risk. The trap is to miscalculate max gain by ignoring that the stock is sold below cost.

PARTIAL HEDGE of downside risk:
• The short call premium gives some downside cushion.
• But it does not protect against a major drop.
• Upside is capped, downside is still largely exposed.
• Therefore: income strategy + partial hedge (but FINRA classifies it primarily as income).

Question 10

An investor sells short 100 RST at 58 and buys 1 RST 60 call for 3.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 10

Type: Short Stock + Long Call (Protected Short = Full Hedge)

Max Gain: $5,500
Calculation:
If stock goes to 0: gain on short stock = 58 points = $5,800
Less premium paid: 3 points = $300
Net max gain = 58 − 3 = 55 points = $5,500

Max Loss: $500
Calculation:
If stock rises above 60, exercise call and buy at 60
Loss on short stock: 60 − 58 = 2 points = $200
Plus premium paid: 3 points = $300
Total max loss = 2 + 3 = 5 points = $500

Breakeven: 55
Calculation:
Short sale price − premium = 58 − 3 = 55

Series 7 FINRA Rationale:
This is the mirror image of a protective put, but on the short side. FINRA wants you to see that the long call caps the otherwise unlimited risk of a short stock position.
Pattern:
• Max gain = (Short sale price − 0) − Premium
• Max loss = (Call strike − Short sale price) + Premium
• Breakeven = Short sale price − Premium
The trap is forgetting that the call protects the short, so loss is limited, not unlimited.

Question 11

A customer sells short 100 XYZ at 40 and buys 1 XYZ 42 call for 5.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 11

Type: Short Stock + Long Call (Protected Short = Full Hedge)

Max Gain: $3,500
Calculation:
If stock goes to 0: gain on short stock = 40 points = $4,000
Less premium paid: 5 points = $500
Net max gain = 40 − 5 = 35 points = $3,500

Max Loss: $700
Calculation:
If stock rises above 42, exercise call and buy at 42
Loss on short stock: 42 − 40 = 2 points = $200
Plus premium paid: 5 points = $500
Total max loss = 2 + 5 = 7 points = $700

Breakeven: 35
Calculation:
40 − 5 = 35

Series 7 FINRA Rationale:
FINRA uses this to test whether you can handle hedging on the short side. The long call is “insurance” against a rising stock. The trap is to treat this like a naked short stock and say “unlimited loss.” That’s wrong here—the call caps the loss.

Question 12

An investor sells short 100 ABC at 75 and buys 1 ABC 80 call for 4.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 12

Type: Short Stock + Long Call (Protected Short = Full Hedge)

Max Gain: $7,100
Calculation:
If stock goes to 0: gain on short stock = 75 points = $7,500
Less premium paid: 4 points = $400
Net max gain = 75 − 4 = 71 points = $7,100

Max Loss: $900
Calculation:
If stock rises above 80, exercise call and buy at 80
Loss on short stock: 80 − 75 = 5 points = $500
Plus premium paid: 4 points = $400
Total max loss = 5 + 4 = 9 points = $900

Breakeven: 71
Calculation:
75 − 4 = 71

Series 7 FINRA Rationale:
Again, FINRA is reinforcing the pattern: short stock + long call = limited risk, large but finite gain potential. The call strike being above the short sale price means the investor can lose some money before the call kicks in. The trap is to forget to add the premium to the loss when computing max loss.

Question 13

A customer sells short 100 LMN at 60 and buys 1 LMN 65 call for 2.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 13

Type: Short Stock + Long Call (Protected Short = Full Hedge)

Max Gain: $5,800
Calculation:
If stock goes to 0: gain on short stock = 60 points = $6,000
Less premium paid: 2 points = $200
Net max gain = 60 − 2 = 58 points = $5,800

Max Loss: $700
Calculation:
If stock rises above 65, exercise call and buy at 65
Loss on short stock: 65 − 60 = 5 points = $500
Plus premium paid: 2 points = $200
Total max loss = 5 + 2 = 7 points = $700

Breakeven: 58
Calculation:
60 − 2 = 58

Series 7 FINRA Rationale:
FINRA wants you to see that the call is a cap on risk, not a source of income here. The premium is a cost, so breakeven moves down from the short sale price. The trap is to confuse this with a short call credit situation and move breakeven the wrong way.

Question 14

An investor sells short 100 DEF at 90 and buys 1 DEF 95 call for 6.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 14

Type: Short Stock + Long Call (Protected Short = Full Hedge)

Max Gain: $8,400
Calculation:
If stock goes to 0: gain on short stock = 90 points = $9,000
Less premium paid: 6 points = $600
Net max gain = 90 − 6 = 84 points = $8,400

Max Loss: $1,100
Calculation:
If stock rises above 95, exercise call and buy at 95
Loss on short stock: 95 − 90 = 5 points = $500
Plus premium paid: 6 points = $600
Total max loss = 5 + 6 = 11 points = $1,100

Breakeven: 84
Calculation:
90 − 6 = 84

Series 7 FINRA Rationale:
This reinforces the same pattern with bigger numbers. FINRA wants to see if you can stay consistent under pressure: short stock + long call = limited risk, large but finite gain, breakeven = short sale price − premium. The trap is to panic and say “unlimited loss” just because you see “short stock.”

Question 15

An investor sells short 100 ABC at 52 and writes 1 ABC 50 put at 2.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 15

Type: Covered Put (Short Stock + Short Put = Partial Hedge + Income)

Max Gain: $400
Calculation:
If stock falls to 50 and is put to the writer:
Gain on short stock: 52 − 50 = 2 points = $200
Plus premium received: 2 points = $200
Total max gain = 2 + 2 = $400

Max Loss: Unlimited
Calculation:
If stock rises sharply, short stock losses are unlimited. The 2‑point credit only slightly offsets that.

Breakeven: 54
Calculation:
Short sale price + premium received = 52 + 2 = 54

Series 7 FINRA Rationale:
This is a “covered put” because the short stock covers the short put. FINRA wants you to know that while the put is covered from an options perspective, the overall position still has unlimited upside risk from the short stock.
The pattern:
• Max gain = (Short sale price − Put strike) + Premium
• Max loss = Unlimited
• Breakeven = Short sale price + Premium
The trap is to think “covered” means “limited risk.” It doesn’t here.

PARTIAL HEDGE of UPSIDE risk:
• The short put premium gives some cushion if the stock rises.
• But it does not eliminate the short stock’s unlimited upside risk.
• Therefore: income strategy + partial hedge (but again, FINRA classifies it primarily as income).

Question 16

A customer sells short 100 XYZ at 40 and writes 1 XYZ 38 put at 3.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 16

Type: Covered Put (Short Stock + Short Put = = Partial Hedge + Income)

Max Gain: $500
Calculation:
If stock falls to 38 and is put to the writer:
Gain on short stock: 40 − 38 = 2 points = $200
Plus premium received: 3 points = $300
Total max gain = 2 + 3 = $500

Max Loss: Unlimited

Breakeven: 43
Calculation:
40 + 3 = 43

Series 7 FINRA Rationale:
FINRA uses this to test whether you understand that the short put offsets gains on the short stock as the stock falls. Below the strike, gains on the short stock are offset by losses on the put. Above the market, the short stock is exposed to unlimited risk. The trap is to think the put somehow caps the upside risk—it doesn’t.

PARTIAL HEDGE of UPSIDE risk:
• The short put premium gives some cushion if the stock rises.
• But it does not eliminate the short stock’s unlimited upside risk.
• Therefore: income strategy + partial hedge (but again, FINRA classifies it primarily as income).

Question 17

An investor sells short 100 RST at 60 and writes 1 RST 55 put at 4.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 17

Type: Covered Put (Short Stock + Short Put = = Partial Hedge + Income)

Max Gain: $900
Calculation:
If stock falls to 55 and is put to the writer:
Gain on short stock: 60 − 55 = 5 points = $500
Plus premium received: 4 points = $400
Total max gain = 5 + 4 = $900

Max Loss: Unlimited

Breakeven: 64
Calculation:
60 + 4 = 64

Series 7 FINRA Rationale:
This reinforces the same pattern with a deeper in‑the‑money structure. FINRA wants to see if you can still correctly identify unlimited risk even when the numbers look “protected” on the downside. The trap is to focus only on the downside math and forget that short stock can lose without limit on the upside.

PARTIAL HEDGE of UPSIDE risk:
• The short put premium gives some cushion if the stock rises.
• But it does not eliminate the short stock’s unlimited upside risk.
• Therefore: income strategy + partial hedge (but again, FINRA classifies it primarily as income).

Question 18

An investor sells short 100 LMN at 48 and writes 1 LMN 45 put at 1.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 18

Type: Covered Put (Short Stock + Short Put = = Partial Hedge + Income)

Max Gain: $400
Calculation:
If stock falls to 45 and is put to the writer:
Gain on short stock: 48 − 45 = 3 points = $300
Plus premium received: 1 point = $100
Total max gain = 3 + 1 = $400

Max Loss: Unlimited

Breakeven: 49
Calculation:
48 + 1 = 49

Series 7 FINRA Rationale:
FINRA is drilling the same concept: short stock + short put = capped downside profit, unlimited upside risk. Below the strike, gains on the short stock are offset by losses on the put, so profit is capped. Above the market, the short stock can lose without limit. The trap is to mislabel this as “limited risk” because the put is “covered.”

PARTIAL HEDGE of UPSIDE risk:
• The short put premium gives some cushion if the stock rises.
• But it does not eliminate the short stock’s unlimited upside risk.
• Therefore: income strategy + partial hedge (but again, FINRA classifies it primarily as income).

Question 19

An investor sells short 100 DEF at 70 and writes 1 DEF 65 put at 3.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 19

Type: Covered Put (Short Stock + Short Put = = Partial Hedge + Income)

Max Gain: $800
Calculation:
If stock falls to 65 and is put to the writer:
Gain on short stock: 70 − 65 = 5 points = $500
Plus premium received: 3 points = $300
Total max gain = 5 + 3 = $800

Max Loss: Unlimited

Breakeven: 73
Calculation:
70 + 3 = 73

Series 7 FINRA Rationale:
This is another reinforcement of the same risk profile. FINRA wants you to internalize that “covered” in options language does not always mean “safe” in risk terms. Short stock + short put has unlimited risk if the stock rises sharply. The exam trap is to see “covered put” and assume limited risk like a protective put or a covered call. Different animal.

PARTIAL HEDGE of UPSIDE risk:
• The short put premium gives some cushion if the stock rises.
• But it does not eliminate the short stock’s unlimited upside risk.
• Therefore: income strategy + partial hedge (but again, FINRA classifies it primarily as income).

Question 20

A customer buys 100 ABC at 40 and buys 1 ABC 38 put for 2.
Type: _____________
Max Gain: ________
Max Loss: ________
Breakeven: _______

Answer 20

Type: Protective Put

Max Gain: Unlimited

Max Loss: $400
Calculation:
Stock loss down to strike: 40 − 38 = 2 points = $200
Plus premium paid: 2 points = $200
Total max loss = 2 + 2 = $400

Breakeven: 42
Calculation:
40 + 2 = 42

Series 7 FINRA Rationale:
FINRA is checking whether you understand that the put guarantees a minimum sale price (the strike), but the investor still loses the difference between purchase price and strike, plus the premium. The exam trap: many candidates think the max loss is just the premium. That’s wrong. You must always include the stock loss down to the strike. Again, the pattern holds: breakeven = stock cost + premium.