Put option sample 60 40
In Tips For Series 7 Options Questionswe discussed "pure" options strategies. Here, we will focus on the considerable number of questions on the Series 7 exam that test the candidates on strategies involving both options contracts and stock positions. For everything you need to know for the Series 7 exam, see our Free Series 7 Online Study Guide. Solving "Mixed" Options Strategy Problems The first strategy to use in solving these questions is deceptively simple: Read the questions carefully to determine the customer's primary objective:. As with the majority of options questions on the Series 7 exam, the scope of the questions is limited to maximum gain, maximum loss and breakeven. To learn more, read Option Spread Strategies and Options Basics. Don't take a chance by trying to keep track of the money flow in your head. The Series 7 exam is quite stressful for most people, so just write it down. In any strategy that combines stock with options, the stock position takes precedence. This is because options contracts expire - stocks do not. Hedging Let's begin with hedging strategies. We will look at long hedges and short hedges. In each case, the name of the hedge indicates the underlying stock position. The options contract is a temporary form of insurance to protect the investor's stock position against adverse movements in the market. For related reading, see A Beginner's Guide To Hedging. If the market in a stock turns down, the investor with the long stock position loses. If an investor needs to protect a stock position with options, the investor must buy the contract like an insurance contract and pay a premium. Puts go in-the-money become exercisable when the stock's market price falls below the strike price. The put is an insurance policy for the investor against a drop in the market. To read more, check out Prices Plunging? Let's look at few sample questions that illustrate one of the many approaches the exam may take to this subject. For these examples, we'll be changing only the multiple choice options that could be provided for the same question. This set of answers goes a bit more deeply into the strategy. By purchasing puts with a strike exercise price of 40, the investor has set the delivery selling price of XYZ at 40 until the options expire. Why not buy the 50 put? When the market is at 40, a put put a strike price of 50 would be in the money by 10 points. Remember, puts with higher strike prices are more expensive. Essentially, the investor would be "buying his own money," if he purchased the 50 put in this case. This is a put of a trick question. The stock position takes precedence. A long stock position is bullish, and it profits when the market rises. There is theoretically no limit as to how high the market can rise. To recover his original investment and the options premium, the stock must go to When an investor sells stock short, he or she expects the sample in that stock to fall. If the stock rises, the investor theoretically has an unlimited loss. To insure themselves, investors may buy calls on the stock. The short stock position is bearish. The long call is bullish. An investor who sample stock short is obligated to replace the stock. If the stock price rises, the investor loses. The investor buys a call to set or fix the purchase price. Until the options contract expires, the investor will pay no more than the call's strike price for the stock. To learn more, read the Short Selling tutorial. This is a direct strategy question. The basic definition of a short hedge is short stock plus a long call. The investor must buy the insurance to protect the stock position. As you can see, the long and short hedges are mirror image strategies. Remember, the stock position takes precedence and the investor must pay a premium buy a option to protect the stock position. If the question refers to protection, hedging is the strategy. Creating Income with Stock Plus Options The first, and most popular of these strategies is writing covered calls. To read more, see Come One, Come All - Covered Calls. Recall that when an investor sells a call, he or she is obligated to deliver the stock at the strike price until the contract expires. If the investor owns the underlying stock, then he or she is "covered" and can deliver if exercised. This is a "classic" covered call situation. The call premium received creates the income and, at the same time, reduces downside risk. A covered call increases income and reduces risk. Option are the two objectives of this conservative strategy. The strategy works best in a relatively flat to slightly bullish market. Investors must be made aware that:. Short Stock Plus Short Put Another, and much riskier, strategy involves writing a put when the investor has a short position in the same stock. This position is a very bearish strategy. Remember, the stock position takes precedence. The investor who holds a short stock position loses when the market begins to rise. On the Series 7 exam, there are relatively few questions on this strategy. Recognize, however, the put gain, maximum loss and breakeven - just in case. Protection of the stock position through hedging 2. Creating income by selling an option against the stock position. The strategies outlined here may be either highly risky or very conservative. In the Series 7 exam, the candidate must first recognize which strategy recommendation is required and then follow the money to find the correct answer. Dictionary Term Of The Day. The simultaneous purchase and sale of an asset in order to profit from a difference Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. Solving Mixed Options Problems On The Series 7 By Investopedia Staff Share. Read the questions carefully to determine the customer's primary objective: If the question indicates that a customer needs to protect a stock position, then he or she must buy an options contract for protection. Sample the customer is put options with stock positions option create income, he or she must sell an options contract to produce the income. The investor is confident that the stock is a good long-term investment with additional upside potential but is concerned about a near-term weakness in the overall market that could wipe out his unrealized gains. Which of the following strategies would probably be the best recommendation for this customer? Sell calls on the stock B. Buy calls on the stock C. Sell puts on the stock D. Buy puts on the stock Answer: This is a basic strategy question. The customer wishes to fix, or set, his selling price for the stock. When he buys puts on the stock, the selling or delivery price for the stock is the strike price of the put until expiration. The long stock position is bullish, so to counter a downward movement, the investor purchases puts. Long puts are bearish. Buy XYZ 50 puts Sell XYZ 40 calls Buy XYZ 40 puts Sell XYZ 50 calls Answer: Let's try some others. The investor is confident that the stock is a good long-term investment with additional upside potential, but is concerned about a near-term weakness in the overall market that could wipe out his unrealized gains. What is the maximum gain for this investor? Now let's take a put look at this question: Track the money as shown in the graph below: Now, let's look at the other side of the market. To protect against a sudden rise in price, a registered representative would recommend which of the following? Sell a MNO put. Buy a MNO put. Sell a MNO call. Buy a MNO call. Now let's try a different approach. Example 7 An investor has sold shares of FBN stock short at 62 and buys one FBN Jan 65 call 2. If FBN stock rises to 70 and the investor exercises the call, what is the gain or loss in this position? The Series 7 exam may give you a hint by using the word, "income", as in Example 8, below. Example 8 An investor owns shares of PGS. The stock has been paying sample dividends but has shown very little growth potential. If the investor is interested in creating income while reducing risk, the registered representative should recommend which of the following strategies? Buy a call on PGS. Buy a put on PGS. Sell a call on PGS. Sell a put on PGS. Let's add some numbers to the situation and ask some additional questions: Again, follow the money. Investors must be made aware that: There is a limited gain. The stock may be called away. Example 11 An investor sells shares MPS short at 70 and simultaneously writes one MPS 70 put 3. What is the maximum option in this strategy? What sample the maximum loss? Summary Options with stock positions have two basic objectives: The standard covered call can be used to put positions or generate income. This calendar spread may do so more effectively. The adage "know thyself"--and thy risk tolerance, thy underlying, and option markets--applies to options trading if you want it to do it profitably. A brief overview of how to put from using put option in your portfolio. We'll show you how to ace the largest and most difficult section of this exam. A good place to start with options is writing these contracts option shares you already own. Learn how this simple options contract can work for you, even when your stock isn't. A brief overview of how to provide from using call options in your portfolio. Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons. Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock. You can recover from your losses if you know how to use this handy trader's tool. Learn how a covered call or covered put option strategy can be used to earn additional income on positions in stocks in the Learn about option strategies used to hedge a long stock position in the telecommunications sector, including bear put spreads Learn what the difference between going long and going short, why it is riskier to be short than long, and the risk associated Essentially, when speaking of stocks, long positions are those that are bought and owned, and short positions are those that Learn what a covered call strategy is, how the strategy is created, and how to calculate the limited maximum loss on a covered The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different A general term describing a financial ratio that compares some sample of owner's equity or capital to borrowed funds. The degree to which an asset or security can be quickly bought or sold in the market without affecting the sample price. A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general The amount of sales generated for every dollar's worth of assets in a year, calculated by dividing sales by assets. No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator. Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers. Get Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy. Example 10 Take the same situation as in Example 9 and ask the question: Example 12 Another question regarding this scenario:
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