SERIES 7 EXAM STUFY TIPS - SERIES 7 COVERED OPTION STRATEGY EXAMPLES - SERIES 7 HELP

Being able to understand and conceptualize Covered Call Options is important to do well on the Series 7 exam. 

The first point to understand is the underlying strategy. That strategy is normally to generate income from selling (or shorting or writing) the call option on a stock you own. Covered call writing is normally when a holder of the stock expects little to no movement or some modest downward price decrease where the income received by writing the call helps hedge the stock decrease. 

COVERED CALL EXAMPLE  

A person owns 100 Shares of DFR stock at a price of $90. The holder based on the stocks price history expects stability over the next 2 months. So if we mark the date as Feb 10th, the investor decides to Write (or short/sell) 1 DFR APR 95 CALL for a $500 premium. The premium is the income. 

Standard options expire monthly and call options get exercised or increase in value when the underlying stock increases. If the stock does not increase or at least does not hit 95, the option may expire worthless. The investor will keep the $500 premium. That is profit. If this is successful, the investor has also lowered his overall cost for the stock, which is now at $85 a share. 

Let's review the layout and see what the overall maximum gain, maximum loss and breakeven would be. 

BUY 1 DFR @90

SHORT 1 DFR 95 CALL@5

The breakeven is the cost layout per share of the stock and premium received, which is 85

The Maximum loss is the same as the breakeven point in total money spent, which is $8500. If the stock declines to zero (worthless), the option does not protect that potential stock loss, so the $9000 spent is all at risk. If we minus the $500 received, the maximum loss is clearly $8500. 

The Maximum gain also has to do with the stock profit potential. Always focus on the stock with stock and option pairings. The stock is where most of the money is invested and is the main position. The Stock is a hedge. 

The Maximum gain is the stock rising up until the strike price of the option. When you sell or write covered calls, you obligated to deliver (or sell) 100 shares of the stock at that strike price (95). So the difference in those prices is $500 (90 to 95) plus the $500 premium received which then equals $1000 

For more helpful articles and tips, visit American Investment Training for Investing articles 

and SERIES 7 TRAINING COURSES

 

HOW TO GET YOUR SERIES 63 LICENSE - HOW TO STUDY AND SIT FOR THE SERIES 63 EXAM - SERIES TEST

The Series 63 is a state licensing exam 

The Series 63 covers the principles and rules relating to ethical business practices in the securities industry. The test is intended to provide a basis understanding of uniformed state law and regulations related to the securities industry.

The Uniform Securities Agent Law Exam is a 65 multiple-choice test covering the topics listed in the Series 63 study guide. It is a 65 question exam with 60 of the questions counting toward the final score. 5 of the questions are experimental questions that may or may not appear on graded tests in the future. 

STUDY TIME

Most applicants find a week or even 2-3 days is enough to prepare and study for the Series 63 exam. It is largely memorization and understanding of rules and regulations. There is little or no math involved, unlike the Series 7 or Series 6 which will have some calculations on cost and price of securities. 

SPONSORSHIP

No Sponsor is needed the take the Series 63 or other NASAA exams. This is different than FINRA Broker exams which do require Brokerage Firm Sponsorship.

COURSE OPTIONS

American Investment Training provides online and course book training to pass the Series 63 Exam. 

COURSE FEATURES

SERIES 63 LICENSE COURSE BOOK

E BOOK LEARNING

SERIES 63 CLASSES BY VIDEO

TEST STUDY PLANNER TO HELP YOU PREPARE AND STAY ON SCHEDULE

EXAM QUESTIONS AND ANSWERS SOFTWARE

PASS OUR SERIES 63 PRACTICE EXAMS AND YOU WILL PASS THE EXAM

VISIT AMERICAN INVESTMENT TRAINING FOR ALL COURSE OFFERINGS. 

HOW TO TAKE AND PASS THE SERIES 65 EXAM - BECOME A RIA INVESTMENT ADVISER SERIES 65 HOW TO SIT NO SPONSORSHIP SERIES 65

HOW TO TAKE THE SERIES 65 EXAM - GET LICENSED SERIES 65 RIA

The Series 65 is the license that is needed to be a Registered Investment Adviser. The Uniform Investment Adviser Law Examination consists of 130 questions plus 10 pretest questions covering the materials outlined in the following study outline. Applicants are allowed 180 minutes to complete the examination. 72% is the passing grade needed to pass the Series 65 exam.

NO SPONSORSHIP FROM A FIRM IS REQUIRED TO SIT FOR THE EXAM

The Series 65 Exam consists of 130 graded multiple choice questions. Each person has 180 minutes to compete the test. To pass the Series 65, you must get a 72% passing score. There is not sponsorship required to take the Registered Investment Adviser License Exam.

The Exam covers Topics Including:

Economic factors and concepts - U.S Dollar inflation, economic indicators and reports and trade deficits

Types of risk - economic, market, inflation risk etc. 

Investment Product types and characteristics - Such as Government, municipal and corporate bonds and how their price and yield work along with marketability

Equity products - common, preferred stock, variable annuity - characteristics, risk and suitability

Ethics and laws dealing with customers and investment products and management - Fees, costs and unlawful representations concerning registrations, including conflicts of interest and other fiduciary issues  

SERIES 65 STUDY COURSE

Pass the SERIES 65 using our complete study program. The course includes a full study manual, updated online test questions, video, glossary of terms. study calendar and more! 

Once you register for the course, you will access to:

Study Calendar

License Exam Study Book

Online databank of test questions

Series 65 Video Library

Practice Exams

Midterm Exam

Test taking tips

VISIT AMERICAN INVESTMENT TRAINING FOR THE ONLINE SERIES 65 LICENSING COURSE 

Selling Call Options with long (owned) Stock Shares - Covered Call Writing

Selling or shorting call options that are uncovered is a dangerous strategy in the stock trading markets. Shorting option contracts that are NOT covered requires that a person to deliver (sell) shares of stock to the call holder at a set price. If the writer (seller) does not own the stock, there is an unlimited loss potential - since the stock can rise to an infinite amount.

Owning or long the stock "covers" the option. If the option is exercised, the stock is used to fulfill the obligation on the contract.

Covered Call Strategy Example

Long 100 Shares @$60
Short 1 Feb 65 Call for $300

The Maximum gain, loss and break-even are all tied to the stock performance and the premium received on the option.

The break even is 57. The stock is owned at 60, but the investor received a $300 premium which lowers the overall cost to $5700

The Maximum loss is that total outlay of money. $5700. The $6000 of stock could decline to zero, but the $300 would be retained.

The Maximum gain is the difference between the purchase price and the strike (sell) price on the contract.  That difference is $500 + $300 for the premium received for a total maximum gain of $800.

Calculating Earnings Per Share - EPS Formula Calculation

Earnings per share is the allocation of a company's net income to each outstanding common share of stock. Earnings per share is used by Wall Street & other stock market analysts to measure the profitability of a company versus another company in the same industry, plus is a way of evaluating quarterly financial results of the company. The formula for calculating Earnings per Share is:

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

Average outstanding shares is also known as the Weighted Average number of shares because since a company's outstanding shares on the stock market change all the time, we like to use an average that represents a fair number of shares throughout the year. Some companies use the outstanding number of shares at the end of one period in order to simplify their calculations.

Calculate Earnings per Share

Here's a hypothetical example. ZZZ Corp. has a net income of $50 million for the year ended December 31st, 2010 and has 20 million shares outstanding on the New York Stock Exchange (NYSE). The company does not have any preferred shares outstanding so it does not have to pay out any preferred dividends. What is the Earnings per Share?

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

EPS = ($50 million - $0) / 20 million shares

EPS = $2.50

Analyst Estimates on EPS

Most large cap organizations in the United States have several Wall Street analysts that closely follow the company's earnings and business operations in order to forecast an earnings per share number. Analysts following a company like to issue EPS estimates for for the most recent quarter, the next quarter, the current fiscal year and the next fiscal year. The average of all analysts' estimates are tabulated and a final EPS estimate is released on the financial media. Other information that comes along with EPS estimates is:

i) Number of Analysts - This indicates the number of analysts that have provided estimates for this company and are closely monitoring the business.

ii) High/Low Estimates - This provides estimates of the low end of the EPS versus the high end; generally the closer these estimates are together, the more confident you can be of the earnings estimate.

BECOME A LICENSED FUTURES SERIES 3 BROKER: 

Earnings Per Share - Stock Value through EPS

 Earnings Per Share, And Price/Earnings Ratio - Two Tools For Determining Stock Viability

There is far more to owning a stock than its share price, even if it's the share price that gets all the coverage in the financial press. A share price only shows the price to buy the stock, or how much you can theoretically sell it for, but it does little to convey how much value is retained from holding the stock for the long term.

The key to determining long term value in a stock is it's price/earnings ratio. Price/earnings is, in essence, the price of a share, divided by the earnings per share. Earnings per share is calculated by dividing the total profits (less operating expenses, and preferred stock dividends) by the number of outstanding shares in circulation.

When looking at price/earnings ratio, a handy rule of thumb is to try to calculate how many years of earnings would one share have to accumulate to match the price it was originally purchased at. In most companies, this results in a ratio ranging from 10 to 15, with a few undervalued stocks hitting 7 to 8 years. One of the hallmarks of the dot-com boom was the absurdly high price/earnings ratios - some shares of stock were selling at P/E ratios of 100 or more, during the '90s.

One thing to be aware of is that there are multiple ways of calculating earnings per share; they all boil down to set asides of funds that are paid out before earnings are divided up between shares. If you have any questions about how earnings per share are calculated for a stock you hold, ask your broker for more information.

The key to earnings per share is that by holding a share of a company, you are, in theory, holding a piece of a corporation with a retained value, and you aren't speculating on the price going up indefinitely. One method of maximizing a good PE ratio stock with a stable price is to invest in a dividend purchasing plan - in essence, you're telling the company to reinvest your dividends into new shares of the stock.

BECOME AN INDEPENDENT STOCKBROKER or ADVISOR

Call Option Basics - Long Positions - Buying Contracts Calls on Stocks

 Call Option Trading 

An investor who feels the market will rise on a stock, index, sector or other, may wish to purchase call contract options. 

If SRX Stock is expected to rise (from the investor's point of view), he could purchase a call option will rise in value during it's life if the stock does in fact rise. The value will depend on how high the market rises, and the time left on the contract. All Options have monthly expirations, so time is absolutely part of the strategy, and the risk.

Current market value of SRX is $63. The investor anticipated a jump in price over the next 14 days, but he does not want to spend additional funds to own the shares outright. A cheaper alternative (capital wise) would be to buy call contracts. 

A position scenario could be as the following:

SRX Current Market Value or CMV is $63

Buys 1 SRX SEP 65 Call for a $400 premium per contract.

If SRX begins to increase, the value of the contract will go up. The contract itself allows the buyer to lock in a price of 65 per share until September.  If SRX moves to say $72, the investor can still buy the stock for $65. The contract itself can also be traded. So, if the market doe move to $72, the contract could be worth $1000. The investor could sell the contract and make a profit of $600 from his original investment of $400.  

The risk is the stock remains flat or goes down and the contract expires worthless. The maximum loss would be the $400 invested. The maximum gain is unlimited or unknown for the upside since the owner can lock in a buy price of $63 and the stock could shoot up to anything. The break even is 69. Call (or strike price) of 65 + 4 ($400 premium)