General Securities Representative (Series 7) Practice Exam

Which option strategy might involve letting an option expire?

1. Hedging strategy

2. Closing transaction strategy

3. Speculative strategy

4. Income generation strategy

The correct answer is: Speculative strategy

The speculative strategy involves taking positions in options with the hope that the underlying asset's price will move in a favorable direction, allowing the option to become profitable. In this context, the strategy may lead an investor to allow an option to expire if the anticipated price movement does not occur or if the option is out of the money at expiration. This can be particularly relevant when the investor perceives that holding the option until expiration may be more favorable than exercising it or closing the position sooner. Speculative traders typically buy options based on their forecasts of how the underlying asset will behave. If their predictions do not materialize, they may find that their options expire worthless, which is a possible outcome in such a strategy. In this scenario, the loss is limited to the premium paid for the option, and allowing it to expire could be part of their risk management approach. Other strategies, such as hedging or income generation, are generally aimed at mitigating risk or ensuring a profit through systematic approaches, making it less likely for an investor following those strategies to consciously allow an option to expire without taking other actions. Likewise, closing transaction strategies usually involve actions taken to realize gains or limit losses before expiration.