SIE Understanding Trading, Customer Accounts and Prohibited Activities Question 32: Answer and Explanation

Question: 32

Which of the following pairs are commonly-used references for the same positions?

• A. Open or naked
• B. Long or covered
• C. Short or open
• D. Long or naked

Correct Answer: B

Explanation:

B: Choice B is correct because both refer to the conservative position of buying a security before selling it. A long or covered position refers to owning the security. Choices A and C are incorrect because "open" is not a commonly-used term for a position relative to a security. Choice D is incorrect because long indicates owning a security, whereas naked (or short) refers to selling a borrowed security one does not own. This is an aggressive strategy, with an unknown maximum possible loss. The cost to buy the security to replace the one that was borrowed could be much more than the proceeds of the short sale.