Thursday, July 24, 2014

Options for Series 7 Exam - Stock and Options: Writing Calls

One of the areas in the options section of the Series 7 test are strategies involving Long Stock positions with writing or selling call options. This is called Writing Covered Calls

Options themselves are risky, but writing calls on the same stock that is owned is considered the most conservative of options strategies. So, if you are taking the Series 7 exam, Series 4 or other FINRA test that will ask options questions, try to be mindful that if you own the stock on the call you are writing, your risk on the option side will be low. But if the stock falls to the floor, the option is not going to help you much, except the premium you got.

Reason for Selling or shorting calls with stock

Income is the #1 reason. Income from the premium received, since you are selling the option. You anticipate the stock to be relatively stable or perhaps rise a little or even go down some. The premium on the call offers you a lower breakeven on the stock position because of the premium received.

Example: Buy 100 shares of TRS at $50 and Write 1 TRS Feb 55 Call for $300.

No one can read an investor or traders mind exactly, but on the Series 7 Test, you will be asked what the maximum gain, loss, breakeven and a scenario "stock rises to X and the call is exercised or stock falls and the call expires etc.

It all comes down to common sense and assuming you know what the obligation is when you sell or write Options. when you write a call option, you receive money (premium), but you are obligated to deliver (sell) 100 shares of the stock at the strike price. If you own the stock, the loss liability is limited. In the example above, you already own the stock - and at a lower price than the strike price. You have some profit risk because if the stock rises to 70 or something crazy, the call will most certainly be exercised, and you will be forced to sell at 55. Any situation where the stock rises and the call is exercised, you will have realized your maximum gain. In ANY case THE MAXIMUM GAIN IS: $500 on the stock (difference from share price and strike price and $300 (premium received) = $800

Break even on Covered Calls

Series 7 option questions or if you are a novice options trader, Break-even on covered calls with stock is always COST. Price of stock less premium received. BREAKEVEN HERE IS: 47 Always focus on the stock when figuring out losses, gains and break even You need to answer these questions differently than if they were single contracts where you are taught to add the premium to the strike price on calls. THE STOCK IS THE BIG PICTURE ALWAYS. The option is there for income.

Maximum loss on Stock and selling calls

When options are sold or written, they are for income and to lower break-even. They are not there to protect the stock declining beyond the break-even. If you owned this position, you are good to 47, but any lower than 47 - it's ALL exposed. So the maximum loss is the same as the breakeven - in real dollars = $4700

Good luck on the Series 7 or any exam you are studying for.

Any questions or comments, feel free to leave. Spam or links to unrelated content will not be published, so don't waste your time :)

Nick Hunter

American Investment Training

www.aitraining.com

Monday, July 14, 2014

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Saturday, June 28, 2014

Series 7 Options Help - Stocks with Put option positions. How to figure gains and losses for exam.

Options are a decent size portions of the Series 7 exam. They come in various combinations and set ups on the Series 7. These include Options alone, spreads (buying and selling one type), straddles (using call and puts) and Stock Positions with Options.

This post focuses on Stock with Put Options Together and how to quickly figure out gains, losses and break even points for the series 7 exam. You will ACE Options if you look at with common sense. Not with memorization graphs.

What you have to remember is whenever you see options with a stock position, whether that stock position is Long Or Short - the option is used for only 1 of 2 things. Protection or Income. It is never the main focus of the strategy. So, when you are looking at the strategy and trying see where the maximum gains and maximum losses could come from, think of where your money is tied up.

If you owned 100 shares of TRW Stock at $86, you have $8600 invested. Now, if on the Series 7 exam you see a position like this and a Buy 1 TRW 80 Put for $300 with it, it's important to see what is going on. When you own stock, you want it to go up. A put option is the right to sell the stock at the strike price (80). If the put was purchased alone, without a long stock position on the same stock, then you would want the stock to go down. Your maximum gain is based on the stock decreasing. HOWEVER, if it is owned with a long stock position, the Put is their only for protection.

In the Example:

Buy 100 Shares TRW at $86 and Buys 1 TRW 80 Put for $300

FOCUS ON THE STOCK when looking at gains, losses and Breakeven.

The put does not get in the way of your stock gain. Focus on the stock means you always want stock you have bought to go up. The option, whether it is a call or put is there for income or protection. In this case the Put was bought, so obviously this is not for income. It is for protection of the stock going down.

For this reason The maximum gain is always unlimited when you own stock and own a put. A premium was paid, so that will come off the gain, but the gain is still UNLIMITED. The stock could go to $100, $200....

Maximum Loss - The put is there to protect the stock - that is IT. Best case scenario is the stock goes through the roof and the put expires, but without the put, the stock could fall to 0. The put allows the stock to be sold at 80, regardless of how low the stock goes. It works as a stop-loss order. Only, the option is not "triggered" automatically like a stop order. The Investor must exercise the option and the put option as a cost. In this case $300. So, The maximum loss for this stock and put position is the point loss difference in the stock at 86 and the guaranteed sell price of 80, which is $600 plus the $300 premium paid. Answer: $900.

Break even point with stock and options is VERY simple for the Series 7 exam. It is total cost spent. Stock position and premium paid or received. Stock cost was 86 - premium was 3, so BREAKEVEN IS 89 You start making money at 90. Watch for that trick question. The break even and profit point are NOT THE SAME.

I hope that helped with your understanding of stock and put options for gains, losses and break even. Feel free to add or comment. I will hopefully get to another post on calls with stock and short positions. PASS THE SERIES 7 EXAM!

Nick Hunter American Investment Training Live Virtual Series 7 Classes

Tuesday, April 15, 2014

Options Help Series 7 - Bullish and Bearish Spreads, how to tell FAST

On the Series 7 exam, you will have several questions on spreads, within the options section of the test. Many of these are those annoying roman numeral questions with 2 correct choices, so you need to get them both right. Usually on spreads, you will need to know if a spread is bullish or bearish and whether it is a credit or debit spread. This post will focus on the bull - bear side of the equation.

THIS IS NOT EXPLAINING WHAT OPTIONS ARE etc. You need to have a basic understanding of options contracts for proper understanding of these TIPS.

IF YOU REMEMBER THIS EASY WAY TO FIGURE IT OUT YOU WILL NOT GET THESE QUESTIONS WRONG ON THE SERIES 7 - and you do it the same every time.

First you need to understand some basic things:

You are bullish when your POSITION is profitable when the market goes up. Not that all calls are bullish or all puts are bearish. That is not correct. You are bearish when your POSITION is profitable when market declines.

Ex: Own stock = bullish Short stock = bearish

With options, there are 4 single positions and if you know what each position profits from, you will NEVER get the bullish - bearish questions wrong on the Series 7 or whatever exam you are taking ( Series 4, Series 62, Series 24 )

Here is where you lock into each situation and it is the ONLY thing you need to know or memorize and there are no exceptions: - Don't read to much into it. Just know THIS!

Buy (long) call is ALWAYS BULLISH Sell (short) call is ALWAYS BEARISH Buy (long) put is ALWAYS BEARISH Sell (short) put is ALWAYS BULLISH

No matter what the spread situation and combination, each contract position holds to the above philosophy.

Option spreads are the buying and selling of the same "type" (calls or puts) of option. So calls and puts do not mix in a spread. If you see a call position and a put position in the same strategy, IT IS NOT A SPREAD. There are CALL SPREADS and PUT SPREADS. That's it.

The last factor is the premium attached to each contract. The final pathway to getting Bull/Bear right is to remember that the higher premium side of the market dominates. You do not have to determine whether it is a debit or credit spread to answer the bullish bearish part right on the test. Nor does the market price matter!

Ok, so how can we tell if a call spread or a put spread is bullish or bearish FAST! Because we want fast and easy. The Series 7 is a long test and we want the options questions to be "dunks". So let's look at the positions and show you how to tell quick.

CALL SPREAD EXAMPLE

BUY 1 RFG NOV 80 CALL for $300>
SELL 1 RFG NOV 90 CALL for $100

* Where is the higher premium? On the bullish position (buy call) or the bearish position (short call)? On the long call. Long calls are ALWAYS bullish, so this is a bullish spread. It is also a debit spread because the investor spent more than what he took in.

PUT SPREAD EXAMPLE

BUY 1 POD MAY 45 PUT for $900
SELL 1 POD MAY 55 PUT for $1150

* SAME QUESTION - Where is the higher premium? on the bull side or bear side? Remember above where I wrote when you buy a put, you are ALWAYS BEARISH and when you sell a put you are ALWAYS BULLISH Just memorize the 4 sides of calls and puts and you got this. Sell or Short put is BULLISH and the higher premium is on that one, so this is a BULLISH PUT SPREAD. It is also a credit spread because there was a net gain on the strategy with the premiums.

Practice them for a while and it will be no problem and you will cruise through these options on the Series 7 exam or any finra test where options questions are given.

Feedback? Questions? Post here. Good luck!

Nick Hunter
American Investment Training
Series 7 Courses


Thursday, April 10, 2014

Series 7 Sample Questions - Practice Test Examples

The Series 7 is comprised of many topics. The larger concentration of questions are on Bonds, Options, New Issues and Customer Accounts. The following group of questions has Series 7 test examples of the larger areas and other sections. While being strong on Margin Accounts, Analysis and other topics is important, it is vital to be competitive in the bigger sections to pass the exam and get your Series 7 License.

1. Betsy has just opened an options account and enters an order to buy 1 XYZ Oct 70 Call for $300. What is Betsy’s maximum potential gain?

A) $300
B) $6700
C) $7000
D) Unlimited

Correct answer is D: The maximum gain for the Betsy for the purchase of a call option is unlimited. The appreciation of the underlying stock can go up forever. The maximum loss that Betsy can incur is only the premium paid of $300.

2. A customer has a short margin account with a short market value of $22,000, a credit balance of $42,000 and SMA of $500. What is the equity in the account?

A) $500
B) $20,000
C) $20,500
D) $37,000

Correct answer is B: The equity in a short margin account is equal to the credit balance minus the short market value. SMA is not used when computing equity.

3. A customer has a short margin account with a short market value of $22,000, a credit balance of $42,000 and SMA of $500. What is the NYSE minimum equity maintenance on this account?

A) $5500
B) $6000
C) $6600
D) $12,600

Correct answer is C: Minimum equity maintenance on short margin accounts is 30%. NYSE rules state that you must maintain at least 30% equity based on the current short market value. The short market value of $22,000 must be multiplied by 30%. This equals $6600.

4. An investor owns 100 shares of LKI at $58. He needs to limit his loss to 5 points or less and will accept a longer time for the order to be executed, to make sure the loss does not exceed 5 points. Which of the following orders would be the best recommendation?

A) Sell limit order
B) Sell stop-limit order
C) Sell stop order
B) Buy stop order

Correct answer is B: A sell stop-limit order would be the best choice. A sell stop-limit order specifies a price, but will not turn into a market order. This order will only get executed at the price or better. Stop orders, although quicker in execution, will turn into market orders and the customer will not be guaranteed a specific price. Stop-limit orders are risky, in that the order may or may not get executed, but in this situation, it is the best choice.

Online Series 7 FAQ - Exam overview, tips, career, sponsorship and more.

5. Assuming all of the following bonds from the same issuer are callable now, which one would most likely get called first?

A) 8% maturing 1-15-2016
B) 8% maturing 1-15-2007
C) 4% maturing 1-15-2012
D) 4% maturing 1-15-2007

Correct answer is A: Bonds with the highest coupon rates would be the first to most likely get called. The issuer will look to issue new debt at a lower rate. Since there are two 8% bonds, the one that would most likely get called, would be the issue with the longest maturity. This is because the bond is potentially more expensive with the amount of years it has compared to the shorter one.

6. A customer sells a 6% corporate bond on Tuesday October 4th for regular way settlement. The bond pays interest on July 1st and January 1st. How many days of accrued interest is this customer owed?

A) 98
B) 97
C) 96
D) 57

Correct answer is C: Accrued interest is the interest that is due a seller of a bond since the last day they were paid. Corporate bonds pay on a 30 day month/360 day year. They also settle on the 3rd business day following the trade date (T+3). The trade settles on Friday October 7th. The last pay date was July 1st. The customer is owed 30 days for July, 30 days for August , 30 days for September and 6 days for October. You do not include the settlement date of the 7th.

7. Customers who engage in increased activity of wiring money from their account could indicate which of the following activities?

A) Interpositioning
B) Churning
C) Crossing
D) Money laundering

Correct answer is D: Potential money laundering activities include excessive wiring of money between accounts.

8. Registered Representatives are not allowed to give gifts to customers or other individuals related to the securities business of the representative above:

A) $500
B) $200
C) $100
D) $50

Correct answer is C: The NASD gift limit is $100.

9. A customer sells 100 shares of GHT short at $58 and buys 1 GHT Mar 60 Call @3. What is the customer’s maximum loss?

A) $500
B) $100
C) Unlimited
D) $5500

Correct answer is A: The customer sold short at $58. The call with a strike price of 60, gives this person the right to buy back the stock at $60. If the stock rises, the call can be used to limit the loss to 2 points. The customer can lose $200 on the stock. The customer also paid a $300 premium. Loss potential is $500.

10. A customer owns 200 shares of GHY at $90, and wishes to hedge the position while generating income. What is the best recommendation?

A) Sell calls
B) Sell puts
C) Buy calls
D) Buy puts

Correct answer is A: Selling options will create income. The customer should sell calls. Calls are covered by the underlying stock. If the calls were exercised, the stock would be delivered to meet the obligation. The income also reduces the break-even of the stock.

Visit American Investment Training for:

Series 7 Online Course Training


Thursday, January 23, 2014

Series 7 Examination - Series 7 Study Programs

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The passing grade for the test is 70% and your score is compiled as soon as you finish. The examination is given on computer in a multiple choice format. Students must answer each question during the test. You have an option to change your answers after the exam is finished, before submitting the final selection to end the test.

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Thursday, January 2, 2014

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