SIE Comparison Chart
Need help determining when you should take your exam with the upcoming changes regarding the SIE exam? We made an invaluable chart to help! Continue reading
Category: Series 7
November Study Question of the Month
Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card. Continue reading
Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.
Congratulations to Elizabeth S., this month’s Study Question of the Month winner!
Question
Relevant to the SIE, Series 7, Series 24, Series 79, and Series 82.
Which of the following would not necessarily be restricted shares when you purchase them?:
A. Shares sold by the CEO of the issuing company
B. Shares sold by the CEO’s wife of the issuing company
C. Shares sold by the assistant to the CEO of the issuing company
D. Shares sold by a major shareholder (more than 10% ownership) of the issuing company
Answer: C.
Securities that are held by control persons are called control securities. A control person, or affiliated person, is an individual in a position to exert direct influence on the actions of an issuer. For example, officers, directors, policy-making executives, major shareholders (generally own 10% or more of outstanding shares), and other people who are in a position to directly or indirectly control the management of the company are considered control persons. This includes spouses, family members who live with them, and other entities such as trusts or corporations affiliated with control persons, as defined in Rule 144. When control securities are sold, they become restricted securities even if they were not restricted securities previously.
Tips for Answering Basic Series 7 Options Questions
Struggling with options questions on the FINRA Series 7 exam? Here are ten tips to getting basic Series 7 options questions right. Continue reading
Updated July 6, 2022
Options are a frequently tested topic on the FINRA Series 7 exam. While there are some difficult options questions that involve calculations and identifying different types of spreads, there are also several basic-type options questions. Remembering a few essential points will help you get these more basic questions correct on the exam. Let’s go through some options basics that could be tested on the Series 7 exam.
Good to Know Definitions:
Options Contract: A contract that allows the holder to buy or sell 100 shares of an underlying security at a given price by a given date.
Underlying (security) = refers to the security that must be delivered when an options contract is exercised
Expiration Date: The last day an options contract may be freely exercised before it becomes void. The last day is always the third Friday of the month.
Exercise or Strike Price: The price at which an options holder may buy or sell an underlying security.
Premium: The price paid to an option writer for the right to exercise the option before it expires.
Breakeven Point: The market price of an underlying stock at which the investor neither makes nor loses money
Premiums and Maximum Potential Gain and Maximum Potential Loss
One options topic that comes up often is maximum potential gain and maximum potential loss for different types of options. A concept related to maximum gain and maximum loss that’s easy to remember is that the premium received is the maximum potential gain for an option seller, while the premium paid is the maximum potential loss for an option buyer.
Why is that? Remember that when an investor opens a position by shorting an option, he takes in the premium from the sale. The best-case scenario for that investor is that the option expires unexercised. If that occurs, the investor doesn’t need to take any further action related to the option; he keeps the premium and doesn’t have to shell out money to anyone else.
Example:
If Tim shorts an ABC call option and receives $500 in premiums, his maximum potential gain is $500. He will achieve this gain if the option expires unexercised. In that case, he simply gets to keep the $500 he received when he shorted the option. The same is true for an investor who shorts a put option: he takes in the premium when the option is sold, and if the option expires unexercised, he gets to keep the premium.
On the other hand, an options buyer’s maximum potential loss is the premium paid, or the cost of the option. An option buyer pays the premium to the option seller to open her long options position. If she holds the option through expiration and it’s never exercised, she won’t receive any money from her option transaction. That means the premium paid represents sunk cost or loss on the investment.
Example:
If Sally purchases an XYZ put option and pays a premium of $600, her maximum potential loss is $600. She’ll realize this loss if the option expires unexercised and she holds it through expiration.
In the Money
Another topic that shows up on the Series 7 exam related to options is whether the option is “in the money.” When it comes to these questions, remember that an option is “in the money” when it’s advantageous for its owner to exercise the option. That means a call option is in the money when its underlying security is trading at a price that exceeds the option’s strike price. In that case, the option holder can exercise the option by purchasing the underlying at the strike price and then selling it at its higher market price.
On the other hand, a put option is in the money when its underlying security is trading at a price below the strike price. In that case, the option holder can purchase the underlying security at the market price and then sell it to the option seller assigned the exercised option at the higher strike price.
Note that the phrase “in the money” applies to a call option whose underlying is above the strike price and a put option whose underlying is below the strike price, even if the question is talking about a short options investor’s investment. That’s because the phrase “in the money” is a FINRA definition that applies to the option itself and not a particular position taken related to the option.
Breakeven Points
Breakeven points are another basic topic you should understand for the exam. The breakeven point is the amount that the underlying security needs to be trading at for both buyer and seller to break even on the investment when the option is exercised.
Example:
If Bobby is long a WTC call option with a $50 strike price and a $5 premium, his breakeven point would be $55 ($50 strike price + $5 premium). This means that when WTC is trading at $55, he could exercise his option by purchasing the underlying shares at $50. He could then sell those shares at the market price of $55. He would net $5 from his purchase and sale. However, since he paid $5 in premiums to buy the option, his $5 gain would be washed out by that $5 payment. Hence, he would breakeven on his investment.
The breakeven point for a put option is the option’s strike price minus its premium. If the underlying is trading at that value and the options holder exercises the option, both buyer and seller would breakeven on their investments.
Example:
If Jane is long an XYZ put option with a strike price of $40 and a premium of $4, her breakeven point would be $36 ($40 strike price – $4 premium). This means than when XYZ is trading at $36, she can purchase the underlying shares at that value and then exercise the option by selling them to the seller assigned her option for the $40 strike price. She would net $4 from her purchase and sale. However, since she paid $4 in premiums to buy the option, her $4 gain would be washed out by that $4 payment. Hence, she would breakeven on her investment.
Trading Options
An investor can exit his options position in one of two ways: he can exercise the option or he can trade the option.
Exercising the option involves either buying underlying shares at the strike price in a call option or selling the underlying shares at the strike price in a put option.
Trading an option involves taking the opposite position to an open position, thereby closing that open position. That means that someone who is long a call option can trade his option by shorting the same call, while an investor who is long a put option can trade his option by shorting the same put. Investors who have an open short options position (i.e., they shorted the option and it has yet to expire) can close out their position by purchasing the same option.
When an investor trades an option, gain or loss is calculated by subtracting the premium paid when going long the option from the premium received when shorting the option. If the difference is positive, the investor has a gain. If the difference is negative, the investor has a loss.
Example:
If Marie is long an END call option for which she paid $1,000 total in premiums and she decides to close out her position by shorting the same option, receiving $1,200 in premiums, she will realize a $200 gain ($1,200 received – $1,000 paid). Once she closes her position, she has no other obligation regarding the option because her short position is entered to close out a previous long position.
Note that traded options settle on the business day after the trade date.
Options Premiums
Knowing a bit about options premiums is also important for the Series 7 exam. Remember the premium is the amount an investor pays to go long an option or receives when shorting an option. An option’s premium is essentially its market price.
The premium is made up of two components: intrinsic value and time value. A premium’s intrinsic value is the amount by which the option is in the money. So for a call option, the intrinsic value is the amount that the underlying security’s price is above the strike price.
For a put option, the intrinsic value is the amount that the underlying security’s price is below the strike price. For instance, the premium for a put option with a strike price of $20 and an underlying security trading at $17 would have $3 in intrinsic value.
It’s also important to note that an option premium’s intrinsic value can never be a negative number. If the option is out of the money, its intrinsic value will be 0. So, for instance, if an ABC call option has a strike price of 50 and ABC is trading at 45, the option premium’s intrinsic value would be 0; it would not be -5.
A premium’s time value is the difference between its total amount and the intrinsic value. So time value = premium – intrinsic value. That means an option with a premium of $10 that is in the money by $6 will have a time value of $4 ($10 premium – $6 intrinsic value = $4 time value). Time value typically decreases the closer an option is to its expiration date.
American vs. European Options
Options can be either American-style or European-style. Equity options are American-style options. This means they can be executed at any point prior to or on their expiration date. The expiration date for monthly equity options is the third Friday of the month in which the option expires.
Non-equity options, such as index options, are often European-style options. This means they can only be executed on the expiration date. It is important to remember, however, that either European- or American-style options can be traded on the secondary market at any time before expiration.
If you keep these basics in mind, you should be able to answer many of the options questions that show up on the Series 7 exam correctly. Understanding the points described above will also help you have a better understanding of some of the concepts tested by the more difficult options questions that appear on the exam.
If you’re preparing for the Series 7 exam, explore Solomon Exam Prep Series 7 study materials. Solomon offers a Series 7 Study Guide, Exam Simulator, Video Lecture, Audiobook, Flashcards, and Live Web Classes to help you pass.
October Study Question of the Month
Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card. Continue reading
Congratulations to Megan K., this month’s Study Question of the Month winner!
Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.
Question
Relevant to the Series 6, Series 7, Series 66, and Series 65.
The cost basis for inherited securities is:
A. The same as the deceased person’s cost basis
B. The same as the price of the securities on the date that the original owner dies
C. The same as the price of the securities on the date that the new owner takes possession
D. The lower of the deceased person’s cost basis and the price of the securities when the new owner takes possession
Answer: B.
In the event that the holder of securities dies and passes those securities to one of his heirs, the new owner gets to claim the price of those securities on the deceased person’s date of death as the securities’ new tax basis.
July Study Question of the Month
Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card. Continue reading
Congratulations to Terry F., this month’s Study Question of the Month winner!
Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.
Question
Relevant to the Series 6, Series 7, Series 65, Series 66
Which of the following is true of UGMA/UTMA accounts?
I. Only family members may contribute to a UGMA/UTMA
II. Annual contribution limit of $13,000 per year, per child
III. Assets may only be used for education expenses
IV. Earnings reported under adult custodian’s tax identification
A. I and II
B. III and IV
C. II and III
D. None of the choices listed
Answer: D.
Anyone may contribute to a Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account and there are no contribution limits. Assets in UGMA/UTMA accounts may be used for any purpose and earnings are reported on the minor’s social security account, not the custodian’s.
June Study Question of the Month
*Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.* Continue reading
Congratulations to Veronika J., this month’s Study Question of the Month winner!
***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***
Question (Relevant to the Series 6, Series 7, Series 65, Series 66)
In her junior year in college, Kim’s grandmother dies and leaves Kim several thousand dollars. Kim wants to put some of the money she received from her grandmother into a retirement account. Given Kim’s young age and status as a full-time college student, what would be her best option?
A. Traditional IRA
B. Roth IRA
C. SIMPLE IRA
D. None of the choices listed
Answer: D. You can only contribute earned income to an IRA or tax-deferred retirement plan and so unless Kim has earned income, she cannot contribute to a tax-deferred retirement plan. A SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is an employer-sponsored retirement plan and not available to individuals.
May Study Question of the Month
***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.*** Continue reading
Congratulations to Diane K., this month’s Study Question of the Month winner!
See the answer below!
***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***
Question (Relevant to the Series 7, Series 52, Series 65, Series 66, Series 79)
When the yield curve inverts, that is, when short-term interest rates are higher than long-term interest rates, all of the following are true EXCEPT:
A. It indicates low or no inflation expectations.
B. It indicates higher demand for long-term bonds and lower demand for short-term bonds.
C. It indicates an economic recession.
D. It indicates an economic expansion.
Answer: D. A yield curve plots the yields of similar bonds based on the term of the bond (maturity) and the yield of the bonds, with term on the x-axis and yield on the y-axis. A normal yield curve is upward sloping, indicating that the longer the term of the bond, the higher yield (interest rate). This is because in normal economic conditions, the longer the term of the investment, the greater the risk that interest rates or the economy will change. Thus investors require greater compensation for uncertainties and risks associated with committing their money for longer time periods. This is called the risk premium. When the yield curve is inverted, however, it slopes downward instead of upward. This means that there is higher demand for long-term bonds compared to short-term bonds because investors believe that interest rates will fall in the future. Also, it means that investors are not concerned about inflation. These conditions are associated with a future economic recession.
April Study Question of the Month
***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.*** Continue reading
Congratulations to Margaret C., this month’s Study Question of the Month winner!
See the answer below!
***Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card.***
Question (Relevant to the Series 6, Series 7, Series 62, Series 65, Series 66, Series 82)
To qualify as a long-term capital gain or loss, stock must be held for more than one year. At purchase, the holding period clock begins:
A. On the trade date
B. One day after the trade date
C. On the settlement date
D. One day after the settlement date
Answer: B. According to the IRS, the holding period clock begins the day after the shares were purchased.
It’s Settled: SEC Shortens Regular-Way to T+2
If you’ve ever traded securities or studied for a securities licensing exam, then you’ve probably come across T+3. No, it’s not an herbal supplement or an embarrassing medical procedure. Continue reading
If you’ve ever traded securities or studied for a securities licensing exam, then you’ve probably come across T+3. No, it’s not an herbal supplement or an embarrassing medical procedure. T+3 refers to the regular-way settlement period for most securities transactions. This means that securities must be paid for and delivered by three business days from the trade date. T+3 also means you don’t become the owner of record of a security until three business days after you purchase it.
Well, add T+3 to the list of things that have gone out of style. Effective May 30, 2017, the SEC will shorten the regular-way settlement period to two business days. And so will begin the age of T+2, which is intended to “increase efficiency and reduce risk for market participants,” according to SEC Acting Chairman Michael Pinowar.
This shorter settlement period for the trading of secondary market securities has been discussed by the SEC for years. The change is expected to lower margin requirements for clearing agency members, reduce liquidity stress when markets are volatile, and harmonize settlement with European markets, which moved to T+2 in 2014.
This settlement period will not apply to every securities transaction, though. T+2, like T+3 before it, will apply to:
- Stocks
- Bonds
- Municipal securities
- Exchange-traded funds
- Mutual funds traded through a brokerage firm
- Unit investment trusts
- Limited partnerships that trade on an exchange
The securities industry moves fast. Don’t get left behind! Visit www.solomonexamprep.com or call us at 503-601-0212 for more information about the latest securities exam preparation and education.
Solomon has helped thousands pass their Series 6, Series 7, Series 24, Series 26, Series 27, Series 28, Series 50, Series 51, Series 52, Series 53, Series 62, Series 63, Series 65, Series 66, Series 79, Series 82, and Series 99.
Laboring Toward Completion: The Fate of the Fiduciary Rule
The Department of Labor’s fiduciary rule has been subject to more back and forth than an Olympic table tennis match. Will it go into effect? Will it be repealed? Or will it merely be delayed? The answer seems to change from day to day. Continue reading
Update: On March 1, 2017, the Department of Labor proposed a 60-day delay of implementation of the fiduciary rule. The DOL will allow a 15-day comment period before determining whether to finalize the delay.
***
The Department of Labor’s fiduciary rule has been subject to more back and forth than an Olympic table tennis match. Will it go into effect? Will it be repealed? Or will it merely be delayed? The answer seems to change from day to day. While some groups work toward implementation of the rule, other groups fight against it, questioning whether the Department of Labor even has the authority to issue such a rule.
The fiduciary rule would require financial professionals to put an investor’s interests first—that is, to meet a fiduciary duty—when providing investment advice regarding covered retirement plans.
Let’s look at a brief timeline of the life of the fiduciary rule so far:
February 23, 2015: President Obama called for the Department of Labor to move forward with the creation of rules to limit conflicts of interest regarding investor retirement accounts.
April 14, 2016: The Department of Labor proposed the fiduciary rule, intended to begin implementation on April 10, 2017.
February 3, 2017: President Trump issues an executive order directing the DOL to review the fiduciary rule.
February 8, 2017: A federal district court judge in Texas upheld the Department of Labor’s authority to issue the fiduciary rule.
February 17, 2017: A federal district court judge in Kansas upheld the Department of Labor’s authority to issue the fiduciary rule.
When President Trump issued his executive order, he ordered the Secretary of Labor to provide an “economic and legal analysis” of the rule to answer the following questions:
- Will it reduce investors’ access to a variety of retirement services, offerings, product structures, or other information or advice?
- Has it disrupted the retirement services industry in a way that could harm investors?
- Is it likely to increase the amount of litigation in the industry and thereby cause an increase in prices for investors?
If the Secretary of Labor determines that the answer to any of these questions is yes, it must revise or rescind the rule.
However, many firms are proceeding with their plans to implement the fiduciary rule whether or not the rule as it now exists goes into effect. For example, Merrill Lynch has said it will no longer offer commission-based brokerage IRA accounts. Instead, the firm will offer level fee investment advisory services regardless of the outcome of the fiduciary rule.
Senator Elizabeth Warren of Massachusetts reached out to over thirty leading finance companies, and the overall response from the companies that responded was that they support the fiduciary rule and are prepared to implement it. For example, TIAA wrote, “Putting our clients’ best interests first is a core value at TIAA and, accordingly, we support a best-interest standard,” and Fidelity noted that the firm is “fully prepared to comply with the rule if and when it becomes applicable.”
So even though we don’t know what will be the ultimate fate of the DOL fiduciary rule, it’s safe to say that it has already begun to change the face of the financial industry.
For more information about the DOL fiduciary rule, see our earlier blogpost: https://solomonexamprep.com/news/finra/ready-or-not-here-it-comes-the-dol-fiduciary-rule-2/.