Securities Trader Representative (Series 57) Practice Exam

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Prepare for the Series 57 Exam with our quiz! Cover important topics with multiple choice questions and detailed explanations. Enhance your understanding and boost your confidence for exam success!

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An investor looking to limit risk while still participating in a market uptrend may choose to use which of the following strategies?

  1. Writing calls

  2. Bear spreads

  3. Bull spreads

  4. Short straddles

The correct answer is: Bull spreads

Choosing to use a bull spread strategy allows an investor to limit risk while still participating in an upward market trend. This strategy involves buying a call option at a lower strike price while simultaneously selling a call option at a higher strike price within the same expiration date. By doing this, the investor can benefit from the upward movement in the stock price while capping both potential gains and losses. In a bull spread, the maximum loss is limited to the net premium paid for the spread, making it a safer alternative than simply purchasing call options. This approach suits investors who want to mitigate downside risk but still aim to profit from bullish market conditions. The other strategies do not align with the goal of limiting risk while participating in an uptrend. Writing calls can potentially expose an investor to unlimited loss if the underlying asset's price rises significantly. Bear spreads, on the other hand, are designed to profit from a downward market movement. Short straddles involve selling both a call and a put option, which can lead to significant risk in volatile markets without offering the protective capacity of a bull spread.