6.2 Options Basics
Option contracts provide leverage, income generation, and downside risk hedging. The Series 66 focuses on client suitability and risk mitigation rather than intricate multi-leg spread calculations.
Key NASAA Exam Takeaways
- Call buyers have the right to buy; Call sellers have the obligation to sell.
- Put buyers have the right to sell; Put sellers have the obligation to buy.
- Covered Call: Long stock + Short call (generates income, caps upside, provides downside protection equal to premium).
- Protective Put: Long stock + Long put (synthetic insurance creating a defined floor on losses).
| Position | Market Bias | Maximum Gain | Maximum Loss | Obligation / Right |
|---|---|---|---|---|
| Long Call | Bullish | Unlimited | Premium paid | Right to BUY stock at strike |
| Short Call (Uncovered) | Bearish | Premium received | Unlimited | Obligation to SELL stock at strike |
| Long Put | Bearish | Strike price - Premium | Premium paid | Right to SELL stock at strike |
| Short Put | Bullish | Premium received | Strike price - Premium | Obligation to BUY stock at strike |
Knowledge Checkpoint • Section 6.2
An advisory client owns 1,000 shares of XYZ stock currently trading at $50. The client fears an imminent market correction over the next 60 days but does not wish to sell the stock due to substantial unrealized capital gains. Which strategy is most suitable?