General Securities Representative (Series 7) Practice Exam

What is the result of trading options when an option expires unexercised?

1. Capital loss or capital gain

2. Revenue increase

3. Debt obligation

4. Tax credit

The correct answer is: Capital loss or capital gain

Trading options can lead to various financial outcomes, depending on whether the option is exercised, sold, or expires. When an option expires unexercised, the holder loses the premium they paid for the option. This premium is considered a capital loss. The correct answer is capital loss or capital gain because the loss incurred from the unexercised option directly affects the holder's overall investment returns. If a trader purchases a call or put option and does not exercise it before expiration, the premium spent is a realized loss. This loss is important for tax purposes, as it can potentially offset other capital gains in the trader's portfolio, thus influencing their overall tax liability. The other options, such as revenue increase, debt obligation, and tax credit, do not apply in this scenario. There is no revenue generated from an unexercised option, nor does it create any new debt obligations. Additionally, the expiration of an option does not automatically result in a tax credit. Instead, it simply results in reporting a capital loss, which can be beneficial when considering tax strategies.