General Securities Representative (Series 7) Practice Exam

If an investor wants to act on the price of an index option during the trading day, what action can they take?

1. Buy additional options

2. Close the option position

3. Exercise the option

4. Modify existing orders

The correct answer is: Close the option position

The correct response, which indicates that an investor can close the option position, reflects a fundamental aspect of trading index options. Index options represent the value of a specific stock index, and during the trading day, investors may decide to sell their existing option positions to realize profits or losses based on market movements. Closing an option position involves executing a trade that offsets the investor's existing option position, which is common practice. This could mean selling a call option if they had previously bought one or buying back a put option. This action allows the investor to react to the current market conditions and manage their investment strategy actively. While it is possible to buy additional options or modify existing orders, these actions are not focused on directly responding to real-time market movements in the same way that closing a position is. Exercising the option, which involves converting the option into shares of the underlying asset, is another potential action but is typically reserved for situations where the investor intends to take ownership of the underlying asset, rather than managing the option itself during regular trading hours. Closing the position is thus the most straightforward and practical action for responding directly to the price of an index option during trading.