Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

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Question: 1 / 400

Which option illustrates an obligation and is bearish?

Short puts

Long calls

Short calls

The choice that illustrates an obligation and is bearish is the short call option. When an investor sells or writes a call option (short call), they are obligated to deliver the underlying asset if the option is exercised by the buyer. This position is inherently bearish because the seller of the call believes that the stock price will not rise above the strike price. If the stock price does rise significantly, the seller could face losses as they must provide the shares at the agreed-upon strike price, which would be less than the market price.

In contrast, long calls provide the right to buy an asset, which is a bullish position; short puts imply an obligation to buy the asset but are typically seen as a bullish stance; and long puts give the right to sell an asset, which is a bearish position but does not involve an obligation like the short call does. Thus, the obligation aspect combined with the bearish nature is distinctly characteristic of short calls.

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Long puts

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