Series 7 Options Cheat Sheet

Series 7 Options Cheat Sheet – The Series 7 Exam, also known as the General Securities Representative Examination (GSRE), is an exam that all brokers must pass in order to be authorized to trade securities. Although the exam covers a wide range of financial topics, the selection question is the most difficult.

This article breaks down the world of options contracts and the investment strategies associated with them, while providing useful tips to help test takers achieve a passing score.

Series 7 Options Cheat Sheet

Of the 50 multiple-choice questions in the Series 7 exam, about 35 deal exclusively with optional strategies.

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By definition, a contract requires two parties. When one party receives a dollar on the contract, the other party loses the same amount. This transaction is referred to as a zero-sum game in which both the buyer and the seller achieve profits at the same time.

Most options investors are not interested in buying or selling stocks. Instead, they usually intend to profit from contract trading. In this sense, changing options is like a racetrack. While some take to the streets to buy or sell horses, many bet on the race.

There are many synonyms in the selection space. As the following matrix options table (Figure 1) shows, the term “buy” can be replaced by “long” or “hold”, while the term “sell” can be replaced by “short” or “write”. Change these words frequently within the same question, allowing the tester to recreate this matrix on scratch paper before starting the test.

As Figure 1 shows, the buyer pays a premium to secure all the rights, while the seller receives a premium for the fulfillment of the obligation – known as risk. To this end, an option contract is similar to a car insurance contract, where the buyer pays a premium and has the right to request a no-loss contract in excess of the premium paid. Meanwhile, if the seller receives a call from the buyer, the more he can get is the premium. The same principles apply to option contracts.

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Because an option has a clear expiration date, the time value of the contract is called a “wasted asset.” Remember that buyers generally want to enforce a contract, even if they are unlikely to enforce it because they are better off selling the contract for a profit. On the other hand, sellers want the contract to expire at no cost because it allows them to keep their entire premium, thus increasing profits.

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Series 7 examinees often do not know how to ask questions about the options, but the following four-step process should provide some clarity:

Long-term investors call 1 XYZ Dec 40 3. 47. Investors close the contract before the market closes on the last trading day before the expiration of XYZ shares. What are the investors’ gains or losses?

The question on the test refers to a situation where a contract “trades on its intrinsic value”, which is the perceived or calculated value of the unit using fundamental analysis. The intrinsic price, which may or may not be the same as the current market price, represents the amount the option is in the money. The buyer wants the contract to be monetary (intrinsic value) while the seller wants the contract to be extrinsic. -la-money (no intrinsic value).

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In trouble, investors pay a premium because they have a long contract. The same problem indicates that investors have closed the position. Investors who buy options to close out a position are selling the contract

Long position offset opened. An investor sells the contract at its intrinsic value because it has no time. And since investors bought at three ($300) and sold at the intrinsic price of seven ($700), they end up with a $400 profit.

Looking at Figure 2 titled “Intrinsic Values”, it is clear that the contract is a call and the market is above the strike price (yield) and the contract is in the money. Inside. Instead, contracts work in the opposite direction.

In Figure 1, buyers fall. The market value of the underlying stock must be less than the strike price (in the money) to recover the premium for the contract holder (long-term buyer). Maximum profit and losses are expressed in dollars.

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So to determine that number, you multiply the stock price by 100. For example, if the breakeven point is 37, the maximum profit for the buyer is $3,700, while the maximum loss for the seller is the same amount.

The question of crossbars in Series 7 is likely to be limited in scope, focusing mainly on the straddle strategy and the fact that there are always two tie points.

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The first step when you see a multiple-choice strategy on an exam is to identify the strategy. This is where the matrix in Figure 1 becomes a useful tool. For example, if an investor buys a call and puts the same stock with the same expiration date and the same strike, then the strategy will stop.

Refer to figure 1. If you see puts, calls and puts, putting fantasy around those positions is a dead end.

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It’s actually quite far. If investors sell calls and sell the same stock with the same expiration date and the same strike price, it is short-term.

If you look at the arrows in the circle on the long line in Figure 1, you will notice that the arrows are moving away from each other. It’s a reminder that long-term investors expect change. Now observe the circular arrows on the small straddle to see if they connect. This reminds us that short horse investors expect little or no movement.

By looking at the long or short position in the matrix, you have completed the second part of the four-part process. Since you are using a matrix for initial identification, skip to step 4.

In one camp, investors either buy two contracts or sell two contracts. To get additional profit, add both the insurance premiums and then add the total insurance premiums to the strike price for profit in the call contract segment. Deduct the total amount from the strike price for profit on the contracted portion. Stairs always have two advantages.

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Consider an example. Investors buy 1 XYZ Nov 50 Call @ 4 and long 1 XYZ Nov 50 Put @ 3. Where do investors split?

Tip: Once you’ve identified the deadlock, write two contracts on your scratch pad with the call contract above the put contract. This makes the process easy to see, namely:

Instead of asking for a clear picture of the two gains, ask, “What is the loss between investors?” If you are dealing with a long stop, investors need to achieve profits to recoup the premium. Moves above or below the breakeven point are profitable. The arrows in the table above correspond to the arrows in the circle for long drags. Investors in the long camp are hoping for a change

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Note: Since investors expect volatility in the long term, the maximum loss occurs if the stock price is equal to the strike price (monetary value) because the two contracts have no intrinsic value. However, short-term investors want the market price to close at the money to keep all premiums. In short, everything is upside down.

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If the identification process involves an investor buying (or selling) a call and put on the same stock, if the expiration date or strike price are different, the strategy is a combination. If asked, the calculation of the profit is the same and the same general strategy – volatile or non-volatile – applies.

Spreading strategies is one of the most difficult subjects in the 7 series. Fortunately, combining the above tools with a few acronyms can help narrow down the contagion question. Use a four-step process to solve the following problems:

A spread occurs when long-term and short-term investors of the same type of option (call or spot) contract with different expirations, strike prices, or both. If only the strike price is different, it is referred to as the value or vertical spread. If only the expiration is different, it is referred to as a calendar spread (also called a “time” or “horizontal” spread). If both strike price and expiration date are different, it is called a diagonal spread.

In advertising strategies, investors are either buyers or sellers. When you locate, contact the block in the matrix that represents that location and focus only on that block.

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If the investor spends more than he receives, that is the debit spread (DR). If the investor receives more than the premium

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