Study guide
7.1 Options Basics
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
7.1 Options Basics
Key Takeaways Explain This Topic AI
Options give the holder the right, not the obligation, to buy or sell.
Calls are bullish; puts are bearish.
Premium equals intrinsic value plus time value.
Time value decays as expiration approaches.
Option buyers have limited loss; sellers have limited gain.
Call up, put down is a useful directional reminder.
Last updated: October 2026
Options are derivative securities —their value is derived from an underlying asset such as stocks, indexes, or ETFs. Understanding options is essential for the Series 65 because investment advisers must recognize when clients are using these instruments appropriately.
What Is an Option?
An option is a contract that gives the holder the right, but not the obligation , to buy or sell an underlying asset at a specified price within a specified time period.
Key Option Terminology
- Term Definition
- Premium Price paid by buyer to seller for the option contract
- Strike Price The fixed price at which the underlying can be bought or sold
- Expiration Date The last day the option can be exercised
- Underlying Asset The security the option is based on (stock, index, ETF)
- Exercise Using the right to buy or sell the underlying
- Assignment When option seller must fulfill the contract obligation
- Types of Options
- Call Options
A call option gives the holder the right to BUY the underlying asset at the strike price.
- Aspect Call Buyer (Long Call) Call Seller (Short Call)
- Right/Obligation Right to buy Obligation to sell
- Market Outlook Bullish Bearish or neutral
- Maximum Gain Unlimited Premium received
- Maximum Loss Premium paid Unlimited
- Breakeven Strike + Premium Strike + Premium
Memory Tip : " Call Up " – Call buyers want the stock price to go UP.
Put Options
A put option gives the holder the right to SELL the underlying asset at the strike price.
- Aspect Put Buyer (Long Put) Put Seller (Short Put)
- Right/Obligation Right to sell Obligation to buy
- Market Outlook Bearish Bullish or neutral
- Maximum Gain Strike - Premium (stock to $0) Premium received
- Maximum Loss Premium paid Strike - Premium
- Breakeven Strike - Premium Strike - Premium
Memory Tip : " Put Down " – Put buyers want the stock price to go DOWN.
Option Premium Components
The option premium consists of two components:
Intrinsic Value
Intrinsic value is the amount an option is "in the money"—the immediate profit if exercised.
For Calls : Intrinsic Value = Stock Price - Strike Price (if positive; otherwise $0) For Puts : Intrinsic Value = Strike Price - Stock Price (if positive; otherwise $0)
Time Value
Time value (also called extrinsic value) represents the premium above intrinsic value. It reflects the probability that the option will become more profitable before expiration. Option Premium = Intrinsic Value + Time Value \text{Option Premium} = \text{Intrinsic Value} + \text{Time Value} Option Premium = Intrinsic Value + Time Value
Example : A call option with a $50 strike has a $7 premium when the stock trades at $54.
- Intrinsic value = $54 - $50 = $4
- Time value = $7 - $4 = $3
- Time Decay (Theta)
Options lose time value as expiration approaches—this is called time decay . Time decay accelerates as expiration nears, making options less valuable over time (all else equal).
- Option Moneyness
- The relationship between the stock price and strike price determines an option's "moneyness."
- Status Call Option Put Option Intrinsic Value
- In the Money (ITM) Stock > Strike Stock < Strike Yes
- At the Money (ATM) Stock = Strike Stock = Strike No
- Out of the Money (OTM) Stock < Strike Stock > Strike No
- In Practice
An investor owns a call option with a $60 strike price:
- If the stock trades at $65: The call is in the money by $5
- If the stock trades at $60: The call is at the money
- If the stock trades at $55: The call is out of the money by $5
- American vs. European Options
- Style Exercise Timing Common Usage
- American Any time before expiration Most stock options
- European Only at expiration Many index options
Most exchange-traded equity options in the U.S. are American-style.
Rights vs. Obligations
Understanding who has rights and who has obligations is fundamental to options:
- Position Has a... Pays/Receives Premium
- Option Buyer (Long) Right Pays premium
- Option Seller (Writer/Short) Obligation Receives premium
Option buyers control the contract—they decide whether to exercise. Option sellers must perform if assigned.
On the Exam
Questions often test maximum gain and maximum loss:
- Buyers : Max loss = Premium paid (defined risk)
- Sellers : Max gain = Premium received, but potentially unlimited loss (calls) or substantial loss (puts)
- Key Takeaways
- Options give the holder the right, but not the obligation , to buy (call) or sell (put) an underlying asset
- Call buyers are bullish (want price to rise); put buyers are bearish (want price to fall)
- Option premium = Intrinsic Value + Time Value
- Intrinsic value : How much the option is in the money
- Time value : Premium above intrinsic value; decreases as expiration approaches
Option buyers have limited risk (premium paid); option sellers have limited gain (premium received) but potentially larger losses