American Investment Training

Thursday, December 24, 2015

Become a Registered Investment Adviser - Series 65

Most brokers are licensed Series 7 and Series 65, if they wish to earn commissions and fees for managing assets. The Series 65 or Series 66 (63/65 combo) allows for fee based income. It also gives the Rep a nice "title" of Registered Investment Adviser.

One of the big advantages with the Series 65 is the exam does not require sponsorship for a brokerage firm.  You can get this license BEFORE you apply for a position with a Company. That is a big advantage if you want to show some credentials on your resume.

Another Plus to having the Series 65 and becoming an Investment Adviser is you can use the license "passively". Meaning, you can work as an independent and split/share commissions with a licensed Series 7 broker. An example would be a CPA, Insurance Agent or other Professional with a Series 65 can refer clients to an outside broker and can legally split commissions on trades executed by the Series 7 Rep.

The exam is roughly half the size of the Series 7. A Series 65 course can be taken online through various formats with American Investment Training and their affiliates or you can study via hard cover books and software.

American Investment Training recommends 4-6 weeks of study and passing the practice exams that are given.

Like all FINRA licensing exams, if the test is failed the candidate or trainee must wait 30 days before re-taking the test. One of the formats is an online PASS GUARANTEE. The student is refunded if they fail the test. Practice exams are VERY accurate.

View the PASS GUARANTEE SERIES 65 ONLINE COURSE HERE

Where to take the Series 65 Test

All Broker - Adviser exams can be taken nationwide and globally daily at hundreds of testing centers. It's recommended that you study for the exam first before you schedule an exam date.

Books, Software and Classes are available for the Series 65 license. 

Investment Advisor Home Study Course - Fast Delivery or Online

Becoming an Investment Adviser is not as difficult as many might have thought. There are no college courses required beforehand.

BUILD UP YOUR RESUME AND YOUR CAREER. Good Luck!

Wednesday, October 14, 2015

Series 7 Class and Tutoring Long Island, NY

Series 7 Exam Custom classes, group tutoring and Private tutor or class available for Long Island Brokerage firms, groups or individuals studying for the Series 7 (or other FINRA Exams)



I am a trainer with American Investment Training and I conduct or can create custom in house private classes for the Series 7. This is available for Long Island firms or NYC 


No need to wait for an outside class. I can work around your schedule, keep you informed of every student and their progress. These can be complete classes or "brush up" tutor sessions for 2 or 20 people in your office. 


In house or on site training offers the best way to train your employees to ensure they pass the Series 7 exam as quickly as possible. 

This includes cram tutor sessions on certain topics. Some broker trainees need extra help on select topics that are on the exam ie: Bonds, Options or combination of topics. 

* Day time or Evenings. Weekends can be worked out as well if that is what you need. Long Island, Manhattan or other New York City areas. 

15 years experience and "no nonsense" approach. 

Reply or call/text to get more information or to simply explain what your situation and need is. All classes and group tutoring can be tailored for you. 

Updated Study material is available through American Investment Training at: http://aitraining.com/products.htm 


Facebook Finance Career Page: https://www.facebook.com/Finance-Career-211767578848328/

Thank You,
Nick Hunter
American Investment Training
Hauppauge, Long Island New York
aitbroker@gmail.com

Monday, October 12, 2015

Option Spreads - Figuring Credit or Debit Spreads and Bullish Bearish

Spreads are a type of option strategy that involves the Buying and Selling of Calls (call spread) or Buying and selling of Puts (Put Spread). These strategies can be Bullish or Bearish.

If your overriding philosophy is a rise in the market, then you are playing a Bullish Strategy. If you Buy and Write call option contracts, if you are in a debit situation  - Where you spent more money on the option purchased than the income received on the one you are selling, it is a debit spread and you are Bullish

Ex:

Buy 1 SFG JAN 40 CALL for $400   (bullish)
Sell 1 SFG JAN 50 CALL for $150    (bearish) 

Because the Buy Call side is bullish and the investor paid out a higher premium for that side and is in a debit of - $250 from the premiums - this is a BULLISH CALL SPREAD.

By doing a little reversal, we can create a total opposite approach and philosophy.

Buy 1 SFG JAN 50 CALL for $150  (bullish)
Sell 1 SFG JAN 40 CALL for $400  (bearish)

Now the investor has a Credit of $250, so the profit will be if both options expire. The credit amount equals the maximum gain for the trader. In order for both options to expire, he would need the market to decline as call options lose value or expire if the market declines enough.

This is a credit bearish call spread.

A Put Spread is the same concept, except the Buy Side of the Spread would be bearish, since when you buy a put - you want the market to decline.

Buy 1 TRO DEC 70 PUT for $600
Sell 1 TRO DEC 60 PUT for $100

The above is a debit spread. The debit being -$500. It is a Bearish spread since the Buy Put has a higher premium. The higher cost side always dominates. The debit is also the maximum loss.

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Friday, October 9, 2015

Binary Options Trading Help - Binary Signals Trade

Binary Options Are Making Traders Rich. American Investment Training Partners with a Pro Signals Mentor to Help you.

Binary Options are simply investments which you make based on whether the current price of an asset will rise or fall by the expiration time.
The reason binary options are so popular is because of their amazing payout amounts. You can generate up to 75% of your investment on every winning trade.
B.O.P.S. trading signals are the easiest to read and can make even the newest binary option trader successful.

LEARN TO TRADE BINARY OPTIONS HERE!

Thank You and Good Fortune

American Investment Training
Securities and Insurance Broker Training

Friday, September 18, 2015

Municipal Bonds and Tax Free Yield - Calculating Tax Equivalent Yield

Municipal Bonds and their rules - regulations are covered quite heavily on the Series 7 Exam. Some of these question deal with the core understanding of Muni Bonds and their advantages. The main quality behind these bonds is their tax free status with regards to interest income. Nothing is exempt from Capital Gains Profit (a trick question sometimes on the Test)

Since Municipal Bonds (large majority of them) are exempt from Federal Tax on the interest received, they do not have to offer high coupon interest rates. This allows States and Local Municipalities to raise capital on borrowed money through a bond issue at a lower cost.

Since many Muni Bonds are backed by taxes (G.O - General Obligation Bonds), this is a benefit to the people who live within that municipality.

Tax Equivalent Yield

This is the yield (not the coupon rate always) that a taxable investment like a corporate bond would have to beat to "out-do" a Muni Bond. This assumes ratings and maturity are fairly equal between the 2.

The formula is:

taxable yield = tax free yield divided by 100-tax bracket


If a Muni Bond had a 3% coupon rate and an investor was in the 28% tax bracket and is also being offered a 4.5% corporate bond, which bond would offer the best yield given the tax advantage of the Municipal.

The Muni in this example is 3%. So 3 divided by 72 (100-28) = 4.16%

That 4.16% is what a taxable investment would have to be better than for the investor to not buy the Muni issue. Again, there will be other factors at play, but strictly speaking YIELD, the Corporate at 4.5% would be better - even though it is a taxable investment.

Free Online Glossary from American Investment Training

Series 65 Note

Become a Licensed Registered Investment Adviser. NO SPONSOR NEEDED and goes with the Series 7. Not INSTEAD of. Earn FEES.
SERIES 65 COURSE HERE - Books, Software and Online Options

Friday, September 11, 2015

Short Straddles - Option Strategy Help

Short Straddles for Series 7 - A tutor and tips post for those needing Options help.

A short straddle is the selling or "shorting" of a call and a put option on the same stock or security. These are part of the Options section on the Series 7 but this tutorial can also help individual traders.

The idea or motivation behind a short straddle is to collect the premiums on both options and then hope they expire, thus keeping the premium and attaining a profit. This is one of the few option strategies where an investor wants a neutral market. Nothing too up or down.

Since you will be tested on questions related to Straddles - their maximum gain, loss, break even etc. Lets lay out an example.

SHORT 1 KLK OCT 35 CALL @ $400
SHORT 1 KLK OCT 35 PUT @ $200


The combined premiums collected is the profit point and is the trader's maximum gain.

The maximum gain is $600

The maximum loss is unlimited because of the short call. When you short a naked call, the maximum loss is always unlimited. Shorting a Put does not protect the call or vice versa.

The Break even points are the combined premiums added to the call strike price of 35 and subtracted from the put.

The combined premium is $600 or 6 points.

Thus, the break even points (there are always 2 with straddles) are 41 and 29. If the stock exceeds or goes below these points, the investor is not profitable.

If this were a LONG STRADDLE - The break evens would be the same but the profit would BEGIN as those points are broken through, since in that case the premiums were paid. Long Straddle Option Strategies were discussed in another post on this blog.

SERIES 7 COURSE OPTIONS (BOOKS, SOFTWARE, ONLINE, CLASSES AND MORE)

Thursday, September 3, 2015

Options Help For Series 7 Test - Long Straddles

Help and Understanding Long Straddles for the Series 7 Licensing Exam.

A straddle is using calls and puts at the same time. There are long and short straddles. A long straddle is the buying of calls and puts on the same stock or security. Short straddling is shorting calls and puts on the same security. Straddles are tested on the Series 7 exam or other exam where options are part of the outline.

Long Straddle Example

BUY 1 DFG DEC 70 CALL @ $600
BUY 1 DFG DEC 7O PUT @ $150

The main profit aim for DFG stock to rise or fall below the break even points. There are 2 break evens with long straddles since a call and put are held and were paid for. Most long straddle holders are anticipating big movement in the security. They are usually neither bullish or bearish (those terms are more used
with spreads).

BREAK EVEN

The Series 7 will ask the break-even points for straddles. For this straddle:

Call is the strike price plus the COMBINED PREMIUMS. The combined premiums are 750.

So the B/E for the call option side is 77 1/2

The Put side of the long straddle would be the 70 strike price minus the combined premiums of 750 or 7 1/2.

Thus the Break Even for the Put is 62 1/2

Maximum gain on Long Straddles is UNLIMITED.

This is because of the call side of the straddle. If the price of DFG rises above 77.50 and continues to rise, the put can be allowed to expire or traded away. Either way, there is no limit to how high the rise of the stock can go. Anytime you are long a call and do not have an "obligation" that the long call
is covering, your maximum gain is unlimited. If on the Series 7 exam, they present a scenario where the call is traded away and the put is still active, it is no longer a long straddle and the put maximum gain would be the break even in dollars. In this case, the maximum gain is $6250.

The maximum loss is the combined premiums paid. All long straddle's maximum loss is the premiums paid for the call and the put. Obviously if more than 1 contract was bought, the figure will be higher in dollars. If the above example said 3 contracts were bought. The maximum gain would still be unlimted. The break even points would be the same, but the maximum loss would be tripled. 750 times 3.

Series 7 Topic Tip

Key Things to remember on Long Straddles:

They must involve calls and puts
they must be both bought
the profit is heavy movement so the premiums are covered.
No movement will result in a loss of the contracts are held and allowed to expire.
Remember to count the contracts correctly
There will be 2 break even points


Short Straddles will be talked about in a future post, but feel free to post a question here and we'll be happy to answer it.

For Study Options, please visit American Investment Training and our partners for several course choices:

Virtual Video Class Training

Online PASS Guarantee courses for Series 7, 65, 24 and more

Traditional Books and Software Training

Tuesday, August 25, 2015

Series 7 Sponsorship - Exam Licenses that do not require a Sponsor

This is a copy of our latest career newsletter that we send to our subscribers. It is FREE and goes out a few times a month.
It's a great way to keep up to speed on the brokerage industry, careers, licensing, sponsorship and more. The sign up form is on the side bar of this Series 7 Help Blog

Greetings to our Subscribers, Brokers and Traders.   IMPORTANT Career Info

With Summer ending soon, Brokerage Firms normally amp-up their hiring. Firms can be lazy in the summer :) 

As many of you know, The SERIES 7 needs a pre-hire and sponsorship from a brokerage firm. There are ways to make this easier through American Investment Training and the many firms we work with.

Unlike yrs ago, the Series 7 is not the only license you need, and in fact many financial advisers do not even have a 7 and are making a great living via fee based money management.

Either way, BD's we know WILL sponsor candidates if they can obtain more licenses that DO NOT REQUIRE SPONSORSHIP. We HIGHLY recommend (with our FREE help on registrations) to get these licenses as independents to add to your credentials. Firms need an incentive to sponsor you and minus an active book of clients, they want you to be pro active beforehand.  Firms will not sponsor you if you are not bringing something to the "table". So, let's show them MORE. Below is how:


These are a few of the "self sponsored exams" (no firm or employment needed beforehand) Licenses we recommend if you are looking to enter the brokerage field, expand your credentials for a better job if you are already working for a firm or position yourself to get SERIES 7 SPONSORSHIP:  

SERIES 65 - Investment Adviser  * This is almost a "must get" and it is a pretty simple exam.  The 65 is for money management (fees on assets), where the 7 is for transaction/commission business. Most brokers with clients have BOTH of these licenses. The 65 will immediately accredit you as a REGISTERED INVESTMENT ADVISER. Looks great on a business card, resume and cover letter.  Even if you are in another industry (mortgage, insurance etc.),  you can offer financial services on your own.  This also allows you to share commissions with a broker at any firm you may know. We can help make those connection to students who use us for training! 

SERIES 63 - Uniformed State Law  * All Advisers and Brokers who are doing out of state business or even soliciting must have the 63. Very easy exam that can be passed with our online course or using books/software combos. 
AIT will provide ALL assistance with registration forms, test center locations and all support needed. Once you start the study process, we'll coach you through the rest! Just let us know when you order and we'll keep you on our full and free help list until you are licensed and we assist in your Series 7.
Exam Prep Options:

Series 65 Online Course 
Monitored, Online Tutors and Pass Guarantee. Full refund if you do not pass on the first try
Series 65 Books and Software Combo
 Updated, accurate and offers book and computer/web based learning

Series 63 and all other license training can be found on our full catalog page at  aitraining.com/products.htm

Thank You and all the best $$$ to you
Remember to "like us" on Facebook. Our page is Finance Career
American Investment Training

LOOKING FOR SPONSORSHIP FOR THE SERIES 7 AND SETTING UP AS AN INDEPENDENT BROKER? GET THE GUIDE THAT DOES IT ALL FOR YOU.



GET: "HOW TO BECOME A SUCCESSFUL BROKER AND ADVISER"

Monday, August 24, 2015

Municipal General Obligation Bonds - Understanding GO Bonds

The Series 7 and select Municipal Bond exams including the Series 51 - Municipal Securities Limited Principal  will have topics related to General Obligation Bonds.

Municipal Bonds and Notes that are backed by the taxing power of a municipality are General Obligation bonds. These debt obligations can be state or local issued. Each of these municipalities can use the taxes at their disposal and authorization to raise the money needed to pay off the bond interest and the principal.

While almost all Muni bonds are considered very safe as it relates to timely payments of Interest and return of principal at maturity, G.O Bonds are considered stronger/safer than revenue bonds - assuming all other factors being equal (maturity, issuer etc).  Revenue bonds are backed by a revenue generating facility like a bridge, tolls, usage rentals and other money producing projects. While these are generally safe as well, bonds backed by taxes will have more certainty in the money backing the bond issue.

Death and Taxes are the 2 sure things. If a bond is backed by the taxing power of the state, town or other municipal entity, it is assumed those taxes will be collected. If there is an anticipated lateness in tax collection, the municipality may issue short term notes for immediate financing. Those will most likely be Tax Anticipation Notes - or TAN's for short. 

General Obligation Bonds are backed by a variety of taxes

Local issues will primarily use Property Taxes to back bonds used for School needs, local roads or anything that is non revenue producing at the local level. 

The Series 7 Exam has more municipal issue questions than all of the other types of bonds. The MSRB - Municipal Securities Rule Making Board will make up a good amount of questions surrounding the new issue process and the regulations concerning the underwritings. This will be discussed in further posts. But as always, please feel free to ask a question on this blog on any FINRA Series Exam topic you need help in. 

Non local or State Issued General Obligation Bonds

If the state of Ohio is doing a bond issue, they will use non-property taxes as their primary resource for dollars. States will normally use other taxes such As: Income, Sales and other non local taxes.
Since a municipality relies on the taxes it can raise, the town must have a healthy tax base at their disposal - or at least healthy enough to support the bond and garner a good rating.
A rating company will examine the following before issuing a credit score on the bond:

  • Debt per capita
  • Income per capita
  • Property values or assessed valuations
  • Population Growth
All of these factors are important to see if the area that is supporting the bond issue has enough tax revenue potential to give the bond a healthy credit rating.

Other Definitions for the Series 7:

Overlapping Debt - When a local tax base overlaps the tax base of another, it is known as overlapping debt. An example of this could be two towns sharing the resources of a school, where both areas are paying taxes to support the same facility or services.

Ad Valorem Tax - The name of the property tax that residential and commercial residents are taxed at is called the Ad Valorem Tax.

Competitive underwriting - All General Obligation bonds must be underwritten on a competitive basis. This means that the issuer must offer a competitive bidding process open to broker dealers, where the best price (lowest interest cost) wins. Revenue bonds can be underwritten through negotiation of select Broker Dealers that the municipality may have relationships with. This difference should make common sense, since in a G.O Bond you are raising EVERYONE'S Taxes in the effected area to back the issue - it is very important that the absolute lowest interest rate possible is achieved - thus competitive underwriting ensures that.

Series 7 Study Tip Help: When asked about the difference between GO and Revenue Bonds, remember -   "Obligation" means through taxes. It is the obligation/responsibility of the Government entity to raise the needed tax dollars to back a G.O. Bond. A revenue bond cannot carry such as obligation since revenue from a place or project can never be exact.

Series 7 Virtual Class  - Take a full virtual Series 7 Class

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Hope this helps!
American Investment Training



Thursday, August 6, 2015

Bond Yields for Discount Bonds - Yield to Maturity

Bonds are a big subject on the Series 7 Test and many students need help with them. Most Series 7 Exam students have little experience with Bonds and most will not trade them directly in their Broker Adviser Career.

Bonds that trade in the secondary market are mostly traded at a discount or a premium. The Coupon rate or Nominal Yield is a fixed rate of interest paid to par, so if a bond is purchased at a discount, your overall Yield or Yield to Maturity (your TRUE Yield) will be higher.

This is because the fixed interest rate is paid to par and you have paid below Par.

Example:

3%  10 yr Corporate Bond is priced at 99.00 

And you want to buy 10 bonds. Each Bond is $1,000. So, $10,000 would be par if the price was 100.00. But since it is 99.00, your total purchase would be $9,900 but you would still receive 3% interest payable to $10,000 PLUS, assuming you hold the bond to maturity, you will get back $10,000.

All Bonds mature at par

Your overall Yield to maturity would be higher than 3% and will always be higher than the nominal yield when bought at a discount and held to maturity. 

Next post will be on Premium Bonds and their yield relationship.

American Investment Training - Broker Licensing and Free Career Help




Tuesday, August 4, 2015

Buying Stock - Hedging with long puts - Series 7 Options Help

Buying stock and hedging with puts is a popular strategy for investors and is part of the Series 7 test when dealing with Stock and Option combo scenarios.

Main thing to remember with Long Stock and Long Put set ups is ALWAYS focus on the stock when it comes to maximum gain, maximum loss and break even. 

The Put Option is basically a "stop loss order" that is controlled by you - until the option expires. As opposed to a stop order that will automatically get triggered. Puts cost a premium, but they allow YOU the choice of whether to use it or not.

Stock and Put Example

BUY 100 Shares DFG at $78
BUY 1 DEC DFG 75 Put for $200

Key here is the investor wants the stock to go up. He has $7800 Invested in the stock alone. The $200 premium is added to his cost for protection. So, his cost is $8000 or $80. That is the break-even 80. Should the stock rise above 80 and stay there past the option expiration, it is pure profit for him and he will either allow the option to expire or perhaps trade it away for something back $ wise.

When you buy puts by themselves, you want the stock to go down but when they are placed 1 for 1 with long shares of stock, the person does not want the stock to go down. It is a Hedge.

Maximum Gain 

Maximum gain is unlimited because the stock can rise to an unlimited level. The premium will ultimately be deducted, but that is not able to calculated exactly, so unlimited is always the answer when you are long stock and long options. It will be a choice on the Series 7 exam.

Maximum Loss

This is why the Put was purchased - to limit the loss. Normally, the potential loss would be the whole stock value. In this case, $7800, but since the Put gives the holder the right to sell the stock or "put" it to someone at 75, the max stock part of the loss is $300. Then you add the premium cost of $200, which was paid up front when the option contract was purchased and that equals $500.

So, the maximum loss in this set up is $500

Always remember on the Series 7 or any exam where options are asked is to FOCUS ON THE STOCK when looking at gains losses and break-evens. The option is used for protection when LONG the option or it is used for income when selling or shorting a Call Option.

To learn about Covered Call Writing with Stock, Visit American Investment Training's Free Glossary and definitions Here:   Covered Call and Stock Strategies

Series 7 Course Info:

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Saturday, June 20, 2015

Securities Act of 1933 - Series 7 Study Notes

There are a number of questions related to the Securities Act of 1933 on the Series 7 exam and other broker registration tests. This area of the test is basically memorization and good for flash cards to study.

Some important lines to remember that are most asked areas:

The Act of 1933 only regulates new offerings of securities. The registration of people and the secondary market are later acts.

The "cooling off" period is 20 days after the registration statement is filed. SEC will review the registration during this time. If SEC needs a clarification or a correction is needed, a "deficiency letter" is sent. The registration becomes effective after the cooling off period.

A Prospectus is any notice, advertisement, letter or other communication that offers any security for sale or confirms a sale. This is not the same as the Tombstone.

Tombstone advertisements are allowed but have strict guidelines. Generally the contents will include:

Where the Prospectus can be obtained

Price range of securities offered

Naming of the issuer

Underwriter is basically the broker dealer bringing the issue to market. The underwriter is also responsible for making sure the issue complies with the Securities Act of 1933

Accredited Investors are institutions and larger net worth investors. These Include:

Banks
Insurance Companies
Investment Companies - Mutual Fund Managers, Portfolio Managers
Retirement Plan managers of these institutions

Regulation A is for smaller companies and are exempt from the registration requirements of the Securities Act of 1933. Reg A states that an issuer may raise up to 1.5 mil within 1 year. A notice of sale must be included and an offering circular may be used vs. a defined Prospectus.

Full Series 7 Books and Software Course - 5 Books, Thousands of practice questions and more study options.



CMO Tranches - PAC, TAC, and Companion - Support Tranches

CMO Mortgage Backed Securities is a product covered for the Series 7 License Test. This discusses Companion or Support Tranches

CMO's having PAC or TAC tranches will also have
companion or support tranches to absorb the pre-
payment fluctuations that have been removed from
the PAC and TAC tranches. 

Once the principal is
paid to the active PAC and TAC tranches according
to the schedule, the remaining excess money or shortfall
is reflected in payments to the active companion
tranche. The average life of a companion tranche
may vary widely, increasing when interest rates rise
and decreasing when rates decline. This timing risk is balanced with higher yields.

Companion tranches offer the potential for higher expected yields when prepayments
remain close to the rate assumed at purchase.
Similar to Type II and Type III PACs, TAC tranches
can serve as companion tranches for PAC tranches.
These lower-priority PAC and TAC tranches will in
turn have companion tranches further down in the
principal payment priority.

Companion tranches are
often offered for sale to individual bond investors who want
higher income and are willing to assume more risk of
having their principal returned sooner or later than
expected.

These are less exact CMO Tranches

CMO Bonds - More from American Investment Training's Investing Glossary.

Pass Guarantee Series 7 Online Course 

The above Online Training portal offers a money back guarantee if you fail any exam after completing all the course requirements. This includes the Series 7, Series 6, Series 65, 24 and more.



Monday, June 15, 2015

Study Practice Tips and Techniques For FINRA Exams

One of the questions I get asked often is "what are some study techniques you recommend when preparing for the Series 7?"

One of my old tips for years I used while I was teaching and private tutoring applied to learning from your mistakes when taking practice final exams. This is especially effective for the Series 7, since that exam covers so many topics.

Going over your wrong answers after reviewing an exam should not be rushed. Some students are overly anxious to take another exam without really learning why they chose incorrect answers. Being slow and deliberate will help prevent making not only the same mistake twice, but will help you on that topic in general.

Write out the correct answer explanations into a notebook

Most people write slower than they read, and we also tend to retain information better when it is in our own handwriting.

This method is most effective when the study material you are using has thorough answer explanations written out.

If anyone else has any study technique questions or wished to share some that have worked for them, please leave a comment.

Thanks
Nick Hunter
American Investment Training

Friday, June 12, 2015

Stock Options Tutorial - Short Stock Hedging With Options

Stock with Options Practice Questions - For Series 7 exam or other educational tests.

Some more sample option contract examples and how to look at them correctly:

Short 100 Shares of JKO at $65 and is long (buys) 1 OCT 70 JKO Call for $200

First TIP Help is ALWAYS focus on the stock. The option is only there for one of 2 reasons. For income - which this is not because the option was bought or PROTECTION - and that is the case HERE. A call gives the investor the right to buy the stock at 70. That does not effect the main strategy or focus which is the stock position. Stock positions will have more money invested than an option premium in most cases. So whether the stock is bought or shorted - there is $6500 on the line here, or at least there would be without the protection hedge.

Hedging and protection

The maximum loss WITHOUT the call option here would have been unlimited. Selling stock short is extremely risky if left uncovered. You are obligated to buy back or "cover" the short sale and that price is unknown and when the investor buys back the stock is not known. The option is a like a stop loss order but a little better. Better because unlike a stop loss order, an option is only used if YOU choose to. Problem with the call contract is the cost (premium) which will hit your profit potential. If the option were not there, the maximum gain WOULD BE $6500, since the stock could go to Zero. But because the option cost $200,
The maximum gain is $6300

How to figure Break Even

Break even on stock with options together is always cost. Cost spent or net cost received. In this case, the net cost received is $6300, so  the break-even is 63 

The "add on calls and subtract on puts" break even rules with single options does not apply here. FOCUS ON THE STOCK!

Back to the MAXIMUM LOSS. Since we know that would have been unlimited if the stock was shorted naked without a hedge, the maximum loss here is the difference between the short sale of $6500 and where the stock can be bought back (70), which is $500
plus the premium of $200 = $700  THAT IS THE ONLY WAY TO LOOK AT THESE POSITIONS FOR THE SERIES 7 - SERIES 4 or other exam.

Stock positions are the main play. Options are for hedging - Getting income to lower breakeven or protection. You can only protect when you buy the option. Selling is for income.

Try not to memorize these things. Look to make sense out of them. You have enough to memorize (formulas, rules etc.). Options should not be one of them.

American Investment Training
Finra Exam Broker Study Prep

Options for Series 7 Lesson - Long Stock and Short Options ( Covered 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 :)  This to help people who are studying for the exam.

Nick Hunter
American Investment Training
www.aitraining.com