General Securities Representative (Series 7) Practice Exam

What is one primary reason investors might write options?

1. To protect existing stock positions

2. To enhance their stock position

3. To acquire new stocks

4. To increase risk exposure

The correct answer is: To enhance their stock position

Investors often write options primarily to enhance their stock positions. When an investor writes (or sells) options, they typically do so to generate additional income through the premiums received from the sale of the options. This strategy allows investors to enhance their returns on existing stock holdings without having to make further investments in stocks. For example, if an investor owns shares of a stock, they can write covered call options against those shares. If the stock does not rise above the strike price of the option, the investor keeps the premium received and still retains the stock. If the stock rises above the strike price, the stock may be called away, but the investor still benefits from the premium collected along with any capital gains up to the strike price. This approach to writing options can create a win-win situation where the investor either keeps the stock and the premium or sells the stock at a profit, thus enhancing their overall return on investment.