SIE & Series 7 Options Explained 2026: Puts, Calls, Strategies & Practice

SIE & Series 7 Options Explained: The Complete 2026 Guide

Options are the single most difficult topic on both the SIE exam and the Series 7 exam — and the #1 most requested topic for tutoring among candidates. If you can master options, you'll have a significant edge on exam day.

This guide breaks down every options concept you need, from basic puts and calls (SIE level) to advanced strategies and calculations (Series 7 level), with clear examples and the T-chart method.

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What Are Options? (SIE & Series 7)

An option is a contract between two parties that gives the buyer the right (but not the obligation) to buy or sell an underlying asset at a specific price before a specific date.

The Two Types of Options

Memory Trick: "Call Up, Put Down" — Call buyers want the stock to go UP; Put buyers want the stock to go DOWN.

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In-the-Money vs. Out-of-the-Money (SIE Exam Focus)

This is where most SIE candidates stumble. Here's the simple rule:

Calls

• In-the-money (ITM): Market price > Strike price (exercising is profitable)
• Out-of-the-money (OTM): Market price < Strike price (exercising is not profitable)
• At-the-money (ATM): Market price = Strike price

Puts

• In-the-money (ITM): Market price < Strike price (exercising is profitable)
• Out-of-the-money (OTM): Market price > Strike price (exercising is not profitable)
• At-the-money (ATM): Market price = Strike price

Example: Stock XYZ trades at $55.

• XYZ 50 Call = ITM by $5 (you can buy at $50, stock is worth $55)
• XYZ 60 Call = OTM by $5 (why buy at $60 when stock is only $55?)
• XYZ 50 Put = OTM by $5 (why sell at $50 when stock is worth $55?)
• XYZ 60 Put = ITM by $5 (you can sell at $60, stock is only worth $55)

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Intrinsic Value vs. Time Value

Option Premium = Intrinsic Value + Time Value

• Intrinsic Value = How much the option is in-the-money (minimum $0; can never be negative)
• Time Value = The extra amount above intrinsic value (decreases as expiration approaches)

Example: XYZ stock at $55, XYZ 50 Call trading at $8

• Intrinsic value = $55 − $50 = $5
• Time value = $8 − $5 = $3

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The Four Basic Options Positions

Every options question on the SIE and Series 7 involves one of these four positions:

1. Long Call (Buy a Call) — Bullish

• Max Gain: Unlimited (stock can rise indefinitely)
• Max Loss: Premium paid
• Breakeven: Strike price + Premium
• When to use: You expect the stock to rise significantly

2. Short Call (Sell/Write a Call) — Bearish/Neutral

• Max Gain: Premium received
• Max Loss: Unlimited (if uncovered/naked)
• Breakeven: Strike price + Premium
• When to use: You expect the stock to stay flat or decline

3. Long Put (Buy a Put) — Bearish

• Max Gain: Strike price − Premium (stock can only fall to $0)
• Max Loss: Premium paid
• Breakeven: Strike price − Premium
• When to use: You expect the stock to decline significantly

4. Short Put (Sell/Write a Put) — Bullish/Neutral

• Max Gain: Premium received
• Max Loss: Strike price − Premium
• Breakeven: Strike price − Premium
• When to use: You expect the stock to stay flat or rise

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Hedging Strategies (SIE & Series 7)

Hedging means using options to protect an existing stock position. These two strategies are heavily tested on both exams:

Covered Call (Own Stock + Sell Call)

You own 100 shares of ABC at $50 and sell 1 ABC 55 Call at $3.

Why it's popular: You collect $300 in premium income immediately. If the stock stays below $55, the call expires worthless and you keep the premium plus your stock.

Protective Put (Own Stock + Buy Put)

You own 100 shares of ABC at $50 and buy 1 ABC 45 Put at $2.

Why it's popular: You limit your downside to $7/share no matter how far the stock falls. It's like buying insurance on your portfolio.

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The T-Chart Method (Series 7 Must-Know)

The T-chart is the most reliable method for solving options calculations on the Series 7. Here's how it works:

Step 1: Draw the T-Chart

    Money OUT (Debits)  |  Money IN (Credits)
    --------------------|--------------------
    Buy (premiums paid) |  Sell (premiums received)
    Exercise to buy     |  Exercise to sell

Step 2: Fill in the Numbers

Example: An investor buys 1 XYZ 60 Call at $4 and the stock rises to $70. They exercise.

    Money OUT   |  Money IN
    ------------|----------
    $4 (premium)|
    $60 (buy)   |  $70 (sell at market)
    ------------|----------
    Total: $64  |  Total: $70

Net Gain = $70 − $64 = $6/share ($600 total)

T-Chart for Spreads

Bull Call Spread: Buy 1 XYZ 50 Call at $5, Sell 1 XYZ 60 Call at $2

    Money OUT   |  Money IN
    ------------|----------
    $5 (buy)    |  $2 (sell)
    ------------|----------
    Net Debit: $3

• Max Loss: Net debit = $3/share ($300)
• Max Gain: Difference in strikes − Net debit = ($60 − $50) − $3 = $7/share ($700)
• Breakeven: Lower strike + Net debit = $50 + $3 = $53

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Advanced Strategies (Series 7)

Spreads

A spread involves buying and selling options of the same type (both calls or both puts) on the same underlying stock.

Memory Trick for Spreads:

• Debit spreads: Max loss = premium paid (net debit). You pay to enter.
• Credit spreads: Max gain = premium received (net credit). You get paid to enter.
• Bull spreads: Profit when market goes UP
• Bear spreads: Profit when market goes DOWN

Straddles

A straddle involves buying (or selling) both a call and a put on the same stock with the same strike price and expiration.

Long Straddle Breakevens (two breakevens):

• Upper breakeven = Strike + Total premiums
• Lower breakeven = Strike − Total premiums

Example: Buy 1 XYZ 50 Call at $3 and 1 XYZ 50 Put at $2 (Total premium = $5)

• Upper breakeven = $50 + $5 = $55
• Lower breakeven = $50 − $5 = $45
• Max loss = $5/share ($500) if stock is exactly at $50 at expiration

Combinations

A combination is like a straddle but with different strike prices (and sometimes different expirations). The calculations work the same way as straddles but with two different strike prices.

Collars (Hedge Wrappers)

A collar combines a covered call and a protective put on a stock you already own. It creates a range (floor and ceiling) for your stock position.

Example: Own stock at $50 + Buy 45 Put at $2 + Sell 55 Call at $2

Exam Tip: Collars are popular exam questions because they combine two strategies. If the call premium equals the put premium, it's a "zero-cost collar."

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Spread Direction: Widening vs. Narrowing

A key Series 7 concept for determining whether a spread is bullish or bearish:

• Debit spreads (you pay net premium) are profitable when the spread widens — the difference between the two premiums increases
• Credit spreads (you receive net premium) are profitable when the spread narrows — the difference between the two premiums decreases

How to identify without premiums: Look at the dominant leg (the more expensive option):

• If the long position is dominant (debit spread) → direction matches the long position
• If the short position is dominant (credit spread) → direction matches the short position

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Cost Basis and Sales Proceeds at Exercise

When an option is exercised, the premium adjusts the stock's cost basis — this is a frequently tested concept:

Call Exercised (Buyer):

• Cost basis of stock = Strike price + Premium paid
• Example: Buy 50 Call at $3, exercise → Cost basis = $50 + $3 = $53/share

Call Assigned (Writer):

• Sales proceeds = Strike price + Premium received
• Example: Write 50 Call at $3, assigned → Sales proceeds = $50 + $3 = $53/share

Put Exercised (Buyer):

• Sales proceeds = Strike price − Premium paid
• Example: Buy 50 Put at $2, exercise → Sales proceeds = $50 − $2 = $48/share

Put Assigned (Writer):

• Cost basis of stock = Strike price − Premium received
• Example: Write 50 Put at $2, assigned → Cost basis = $50 − $2 = $48/share

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Options Taxation (Series 7)

Key Rule: When an option is exercised, it doesn't create a separate tax event. The premium adjusts the cost basis of the stock transaction.

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SIE vs. Series 7: What You Need to Know

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Quick-Reference Formulas Cheat Sheet

Single Options

Spreads

Straddles

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Top 5 Options Mistakes on the SIE & Series 7

1. Confusing rights and obligations. Buyers ALWAYS have rights. Sellers/writers ALWAYS have obligations.
2. Mixing up ITM for calls vs. puts. Calls are ITM when market > strike. Puts are ITM when market < strike. They're opposite.
3. Forgetting the premium in breakeven. The breakeven always includes the premium — don't just use the strike price alone.
4. Not using the T-chart on the Series 7. Trying to do options calculations in your head leads to errors. Always draw the T-chart.
5. Confusing covered vs. uncovered. Covered means you own the underlying stock. Uncovered (naked) means you don't — and the risk is much higher.

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Start Practicing Options Now

Options are the hardest topic, but they're also the most learnable with the right approach. Use this guide alongside our free practice questions:

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Our AI tutor can explain any options concept you're struggling with — just click "Ask AI" on any question you get wrong. It's the fastest way to master this challenging topic.