SIE (Securities Industry Essentials) Practice Exam

What is true about investors with short option positions?

1. They have no obligation until the option is sold

2. They can avoid contractual obligations by exiting their position early

3. They have a contractual obligation to perform in accordance with the contract terms if the option is exercised

4. They are protected from any financial loss associated with their position

The correct answer is: They have a contractual obligation to perform in accordance with the contract terms if the option is exercised

Investors with short option positions have a contractual obligation to perform in accordance with the contract terms if the option is exercised. This means that if the option holder chooses to exercise their right to buy or sell the underlying asset, the investor with a short position must fulfill the terms of the contract, which typically involves buying or selling the underlying asset at the agreed upon price. This is different from investors with long option positions who have the right, but not the obligation, to buy or sell the underlying asset. Option A is incorrect because investors with short option positions have a contractual obligation, even if they have not yet sold the option. Option B is incorrect because exiting a position early does not release the investor from their contractual obligations if the option is exercised. Option D is incorrect because investors with short option positions are not protected from financial losses. If the market moves against their position, they may be required to buy or sell the underlying asset at a loss.