General Securities Representative (Series 7) Practice Exam

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When asked for the proceeds or cost basis of an option, what should be identified?

  1. Final price

  2. Breakeven point

  3. Market value

  4. Current share price

The correct answer is: Breakeven point

Identifying the breakeven point of an option is crucial when determining the proceeds or cost basis because it represents the price at which the holder of the option breaks even—meaning they do not incur a loss or profit. The breakeven point is calculated by taking the strike price of the option and adding (for a call option) or subtracting (for a put option) the premium paid for that option. For example, if an investor purchases a call option with a strike price of $50 and pays a premium of $5, the breakeven point would be $55. This means the underlying stock would need to be at least $55 for the investor to recover the total cost of their investment in the option. Other options do not provide an accurate measure of the proceeds or cost basis in this context. The final price and current share price may fluctuate and do not directly relate to the overall cost basis of the option. Similarly, market value does not reflect the specific costs incurred or required for the option to become profitable, hence is not suitable for this purpose. Understanding the breakeven point allows an investor to make informed decisions regarding their options trading strategies.

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