Securities Trader Representative (Series 57) Practice Exam

Which type of trading strategy involves both buying and selling options at different strike prices?

1. Spread strategy

2. Straddle strategy

3. Neutral strategy

4. Risk management strategy

The correct answer is: Spread strategy

The strategy that involves both buying and selling options at different strike prices is referred to as a spread strategy. This approach can take several forms, such as bull spreads, bear spreads, and calendar spreads, each serving different market outlooks and risk profiles. The primary goal of a spread strategy is to limit potential losses while still allowing for some gains, thereby managing risk effectively. In a spread, the trader typically buys one option and sells another option, often with different strike prices or expiration dates. This creates a partial hedge against market movements and can be less expensive than buying options outright due to the offsetting premiums of the bought and sold options. For instance, in a bull spread, one might buy a call option at a lower strike price while simultaneously selling a call option at a higher strike price. This limits both risk and reward, creating a defined range of profit potential that can be more appealing depending on market conditions. The other strategies listed, such as straddle and neutral strategies, do not specifically involve the simultaneous buying and selling of options at different strike prices, distinguishing the spread strategy as the accurate choice in this context.