Securities Trader Representative (Series 57) Practice Exam

An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is referred to as a:

1. Short straddle

2. Short combination

3. Bull spread

4. Bear spread

The correct answer is: Short straddle

The correct strategy described in this scenario is a short combination. When an investor writes a call and a put option with the same strike price and expiration date, they are engaging in a short combination strategy. This approach involves selling both options, which generates premium income for the investor. In this case, the investor writes an XYZ October 70 call at a premium of 3 and an XYZ October 70 put at a premium of 1. The total premium received from this strategy is 4 (3 from the call and 1 from the put), which creates an obligation to fulfill the terms of the options if exercised. This strategy is typically employed when the investor believes that the underlying stock will not move significantly in either direction, as they profit from the premiums while risking the potential obligation if the options are exercised. A short straddle specifically involves writing both a call and a put with the same strike price and expiration, but it generally implies that the investor expects low volatility in the stock — however, the term typically emphasizes the simultaneous writing of both options without the typical "combination" context of the premiums being separately specified. Bull and bear spreads relate to different strategies involving simultaneously buying and selling options at different strike prices, which is not the case