Series 7 Exam Options: Stocks and Puts
Options are hundred-size portions of the Series 7 exam. They come in various combinations and configurations in Series 7. These include single options, spreads (buying and selling of one type), straddles (using calls and puts), and spread positions. stocks with options.
This article focuses on stocks with put options together and how to quickly calculate profit, loss and breakeven for the series 7 exam. You will see ACE Options if you look with common sense. Not with memorization charts.
The thing to remember is that any time you see options with a stock position, whether that stock position is long or short, the option is used for only 1 of 2 things. Protection or Rent. It is never the main focus of the strategy. So when you are analyzing the strategy and trying to see where the maximum profits and maximum losses could come from, think about where your money is tied up.
If you owned 100 shares of TRW Stock at $86, you have $8,600 invested. Now if in the Series 7 review you see a position like this and a call option of 1 TRW 80 Put for $300, it is important to see what is going on. When you have stocks, you want them to go up. A put option is the right to sell the stock at the strike price (80). If the put option was bought on its own, without a long stock position in the same stock, then you want the stock to go down. Your maximum profit is based on declining stocks. HOWEVER, if you are long in stocks, the put option is your only protection.
In the example:
Buy 100 TRW Shares at $86 and Buy 1 TRW 80 Put for $300
FOCUS ON THE ACTION when looking at profits, losses, and break-even.
The put option does not stand in the way of your trading profit. Focusing on stocks means that you always want the stocks you have bought to rise. The option, whether it is a call or a put, is there to gain income or protection. In this case the Put was bought, so obviously this is not for rent. It’s for downside stock protection.
For this reason, the maximum profit is always unlimited when you own shares and have a put option. A premium was paid, so it will be deducted from the profit, but the profit is still UNLIMITED. The stock could go up to $100, $200…
Maximum Loss: The put option is there to protect the stock, that’s IT. In the best case scenario, the stock soars and the put expires, but without the put, the stock could drop to 0. The put allows the stock to sell at 80, regardless of how low it is the actions. It works like a stop-loss order. Only the option doesn’t automatically “activate” like a stop order. The Investor must exercise the option and the put option as a cost. In this case $300. So, the maximum loss for this stock and short position is the point loss difference on the stock at 86 and the guaranteed selling price of 80, which is $600 plus the $300 premium paid. Answer: $900.
The break-even point with stocks and options is VERY simple for the Series 7 exam. It is the total cost spent. Stock market position and premium paid or received. The cost of the stock was 86 – the premium was 3, so BALANCE IS 89. You start making money at 90. Watch for that trick question. The break-even point and the profit point ARE NOT THE SAME.
Look for more articles on understanding Series 7 trading strategy or just for your own insight. Also search the web for our Series 7 Class Blog for more tips.
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