General Securities Representative (Series 7) Practice Exam

In options trading, a spread typically refers to:

1. A single option contract

2. A combination of two or more option contracts

3. A market index

4. A type of security

The correct answer is: A combination of two or more option contracts

In options trading, a spread refers to a combination of two or more option contracts that involve the same underlying asset but different strike prices, expiration dates, or both. Spreads are used to manage risk and can be constructed in various ways, such as bull spreads, bear spreads, and calendar spreads, among others. By utilizing spreads, traders can limit their potential losses and also define their profit windows. For example, in a bull call spread, an investor might purchase a call option at a lower strike price while simultaneously selling a call option at a higher strike price. This creates a position that benefits from a rise in the price of the underlying asset, while also capping potential losses. While a single option contract is a possible trading instrument, it does not qualify as a spread, as it does not involve multiple contracts. A market index or a type of security is unrelated to the concept of spreads in options trading. Thus, the definition of a spread as a combination of two or more option contracts is accurate and captures the essence of how traders use spreads to enhance their trading strategies.