Series 7 Exam Question 105: Answer and Explanation

Question: 105

Ayla sells 1 HIJ Nov 40 put at 6. What is Ayla's maximum potential loss on this position?

• A. $600
• B. $3,400
• C. $4,600
• D. Unlimited

Correct Answer: B

Explanation:

B. You probably don't need an options chart to figure out this one, but I'll show you anyway:

This investor sold the 40 put option so you have to put the $600 received (6 × 100 shares per option) in the Money In side of the chart. That tells you that the maximum potential gain is $600. To determine the maximum potential loss, exercise the option. Because puts switch, you have to put the exercised option on the opposite side of the chart from its premium. After putting $4,000 out, you can see that the investor has $3,400 ($4,000 – $600) more out than in, so that's the maximum potential loss.