General Securities Representative (Series 7) Practice Exam

Which of the following is NOT a method for closing a transaction of an option?

1. Closing the option

2. Exercising the option

3. Letting the option expire

4. Writing a new option

The correct answer is: Writing a new option

The correct response indicates that "writing a new option" is not a method for closing a transaction of an option. To understand why this is accurate, it's essential to first grasp the typical methods used to close an options transaction. When an investor engages in options trading, there are three primary methods to close an open position: 1. **Closing the option**: This involves executing a trade to sell the option that the investor currently holds, thereby liquidating their position. 2. **Exercising the option**: This means that the investor chooses to activate their rights under the option contract, either to buy (for a call) or sell (for a put) the underlying asset at the specified strike price. By exercising the option, the original position is effectively closed as it results in the transfer of the underlying asset. 3. **Letting the option expire**: If the option is not exercised prior to its expiration date and is worthless, it simply expires. This results in the position closing as well, although in this case, the investor does not realize any profit or loss from a trade. In contrast, "writing a new option" involves creating a new option position rather than closing an existing one. Writing an option refers to the act of