General Securities Representative (Series 7) Practice Exam

To cover an uncovered call position, what must you either own or purchase?

1. Stock with a higher strike price

2. A call with the same or lower strike price

3. A put option

4. Any underlying asset

The correct answer is: A call with the same or lower strike price

To successfully cover an uncovered call position, it is essential to own or purchase a call option with the same or lower strike price. This strategy is utilized to mitigate the risk associated with selling a call option without owning the underlying stock. When you have sold an uncovered call, you are obligated to sell the underlying asset at the strike price if the option is exercised. By owning or purchasing a call option with the same or lower strike price, you create a hedge. This means if the price of the underlying asset rises above the strike price of the call you sold, you have the right to buy that asset through your own call, thus limiting your potential losses. Selecting a call option allows you to offset the risk of being called away on your initial uncovered call position. This protective measure ensures that if the market moves against you, you have a strategy in place to manage the exposure and minimize losses. The importance of this approach underscores why owning a call with the same or lower strike price is a strategic choice.