Securities Trader Representative (Series 57) Practice Exam

Which of the following positions is an example of a spread?

1. Buy an XYZ June 60 call and sell an XYZ June 65 call

2. Buy an XYZ June 60 call and buy an XYZ June 60 put

3. Buy an XYZ June 60 call and buy an XYZ June 65 put

4. Sell an XYZ June 60 call and sell an XYZ June 60 put

The correct answer is: Buy an XYZ June 60 call and sell an XYZ June 65 call

The scenario of buying an XYZ June 60 call and selling an XYZ June 65 call exemplifies a spread because it involves two options on the same underlying asset with the same expiration date but different strike prices. This trading strategy, known as a bull call spread, is employed with the expectation that the price of the underlying asset will rise but remain below the upper strike price of the call sold. In this case, by purchasing the lower strike call (the June 60 call), the trader gains the right to buy the underlying asset at $60. Selling the higher strike call (the June 65 call) generates income, which offsets the cost of the call purchased. This set-up limits both potential gains and losses, as the overall risk is contained within the defined range between the two strikes. The other options do not represent spreads based on the typical definition. For instance, buying a call and a put at the same strike price (which occurs in another choice) creates a straddle, not a spread. Similarly, buying two different puts or two different calls without selling one in a specific structure also does not align with spread trading strategies. Spreads are characterized by the simultaneous buying and selling of options, which is what is demonstrated in the correct