Derivatives

Derivatives: Options Basics > Exam relevance: Derivatives questions appear in Section II (Investment Vehicle Characteristics, ~25% of the exam), and options concepts also surface in Section III when testing hedging strategies. Expect 3–5 scored questions that test your ability to calculate breakeven, identify intrinsic vs. time value, and recognize how protective puts and covered calls work in practice. --- ## What Is a Derivative? A derivative is a financial instrument whose value is *derived from* an underlying asset — most commonly a stock, index, or commodity. On the Series 65, the derivatives you need to know are options contracts. An options contract gives the buyer the *right, but not the obligation*, to buy or sell an underlying security at a specified price before or on a specified date. The seller (writer) of the option is obligated to perform if the buyer exercises. --- ## The Four Basic Positions | Position | Right or Obligation | Profitable When | |---|---|---| | Long Call | Right to *buy* at the strike price | Underlying price rises | | Short Call | Obligation to *sell* at the strike price | Underlying price falls or stays flat | | Long Put | Right to *sell* at the strike price | Underlying price falls | | Short Put | Obligation to *buy* at the strike price | Underlying price rises or stays flat | --- ## Key Terms - Strike price (exercise price): The fixed price at which the option holder may buy or sell the underlying security. - Premium: The price paid by the buyer to the writer for the option contract. This is the buyer's maximum loss and the writer's maximum gain…