American Investment Training

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:

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

These are less exact CMO Tranches

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

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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.

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