What is a SPAC and should you care about it for the Series 79 exam?

SPACs have grown by leaps and bounds in recent years. What will this mean for regulations, and will this topic appear on the FINRA Series 79 exam? Continue reading

Updated August 24, 2022

What is a SPAC?

It sounds like a securities-industry riddle: what do you call a blank check company with no hard assets that holds a multimillion dollar IPO? But the answer is very real: SPACs (special purposes acquisition companies) are an alternative to traditional IPOs that have exploded in popularity.

What’s a “blank check company”?  A blank check company is an exchange-listed shell company that, according to the SEC, has “no specific business plan or…its business plan is to engage in a merger or acquisition.”

The purpose of a SPAC is to raise money to acquire a privately held company. Think of it as crowdfunding on a massive scale. First, the SPAC sells shares of itself in an IPO. Then it uses the IPO proceeds to fund a merger between itself and a target company. When the merger is complete, the SPAC’s shareholders become shareholders in the target company. Investors buy SPAC shares based on their confidence that the SPAC’s management will complete the merger and the anticipated value of the shares after the merger.

SPACs have grown by leaps and bounds in recent years. The amount raised by SPAC IPOs in 2020 more than quadrupled the amount they raised in 2019, and the number of SPACs more than doubled from 2020 to 2021. Though SPACs have struggled in 2022, they remain an important new development in the world of securities offerings.

What does this mean for regulations?

As investor excitement around SPACs has heated up, there are indications that the SEC is beginning to take a closer look at this new kind of IPO. On March 10, 2021, the SEC issued a warning against investing based on celebrity involvement with a SPAC. Celebrities with high-profile ties to SPACs include A-Rod, Shaquille O’Neal, Serena Williams, and former Speaker of the House Paul Ryan. Acting SEC Chair Allison Herren Lee recently warned of “more and more evidence on the risk side of the equation for SPACs as we see studies showing that their performance for most investors doesn’t match the hype.”

Will SPACs be tested on the Series 79 exam?

While none of this guarantees that new rules for SPACs are around the corner, it does make it more likely that FINRA’s Series 79 Investment Banking Exam may begin to include mention of SPACs. They are a topic that investment bankers are increasingly likely to encounter in practice, and therefore are increasingly likely to be viewed as fair game for the exam.

Solomon Exam Prep is ahead of the curve with new material in our Series 79 Study Guide. Series 79 customers can find material on SPACs included in both the online and hard copy editions of the Solomon Series 79 Study Guide.

Potentially testable points about SPACs include:
    • SPACs are formed by “sponsors,” commonly institutional investors or high net worth individuals, who are compensated with both a portion of the IPO proceeds, as well as an equity stake in the SPAC of up to 20%.
    • SPACs typically avoid committing to merge with a specific company, even if the SPAC was formed with the intention of targeting that company. The SPAC’s management may respond to changing market conditions by choosing a different target, subject to approval from the SPAC’s shareholders.
    • After a SPAC goes public, its shares trade freely on exchanges even before it completes a merger.
    • A SPAC must hold at least 85% of proceeds from its IPO in an escrow account.
    • The SPAC commits to return investor funds if it fails to complete a merger within a specified timeframe.
    • As a blank check company with no business operations of its own, a SPAC cannot take advantage of certain options available to more established securities issuers. For example, a SPAC is not permitted to make an electronic version of its road show presentation.

For a sample of Series 79 practice questions, try out Solomon’s free Series 79 Sample Quiz.

Solomon Exam Prep will continue to follow industry trends and how they affect your licensing exams. To stay informed, join the Solomon email list! Just click the button below to subscribe:

How to answer state registration questions on the Series 63, Series 65, and Series 66

Read Solomon Exam Prep’s expert guide for answering state registration questions on the Series 63, Series 65, and Series 66 exams. Continue reading

If you’re planning to take the NASAA Series 63Series 65, or Series 66 exam, you can expect to see questions about when broker-dealers and their securities agents need to register in a particular state. You can also expect to see questions about when investment advisers and investment adviser representatives need to register in a state. Instead of feeling intimidated when confronted with such questions, you should relax, smile, and feel confident. That’s because if you follow the simple rules that we’re about to describe, you should get each of these questions right.

Broker-Dealers and Their Agents

First let’s deal with questions about state registration for broker-dealers (BDs) and their agents. Rule number one here is that when a U.S.-based BD or one of its agents has an office located in a state, that BD or agent must register in the state. It does not matter which types of clients a BD or BD agent with an office in a state has or what types of securities those clients buy from the BD or agent. A BD or agent with an office in a state must register in that state. Period.  

What about a BD or BD agent that doesn’t have an office in a state? If a BD or BD agent without an office in a state has any non-institutional clients in that state, the BD or agent must register there. However, if the BD or agent without an office in a state has only institutional clients in the state, no registration in that state is required. Institutional clients include the issuers of securities involved in a specific transaction; other broker-dealers; and institutional buyers, which are big-money entities such as banks, insurance companies, mutual funds, and pension and profit-sharing plans.   

Key takeaway:

So when presented with a question about whether a specific broker-dealer or one of its agents must register in a given state or states, there are two potential questions to ask yourself. The first question is: “Does the broker-dealer or BD agent have an office in the state?” If the answer is yes, it’s simple: the BD or agent must register in that state. End of questions. However, if the answer is no, move on to the second question: “Does the BD or BD agent have any non-institutional clients in the state?” If the answer is yes, the BD or agent must register in the state; if the answer is no, they do not need to register in the state.

Here’s a flowchart to help you remember the question-answering process:

Investment Advisers and Their Representatives

Now let’s look at the state registration requirements for investment advisers that do not register with the SEC. If the investment adviser has an office in the state, it must register there. If the investment adviser doesn’t have an office in the state but has had more than five non-institutional clients in the state during the past twelve months, it also must register there. The rules are the same for investment adviser representatives who work for an investment adviser that does not register with the SEC.

Investment adviser representatives who work for investment advisers that register with the SEC — also known as federal covered advisors — may need to register with the state if they have an office in the state.

Key takeaway:

So if you see a question about state registration requirements for non-SEC registered investment advisers or their investment adviser representatives, the first question to ask yourself is: “Does the IA or IAR have an office in the state?” If the answer is yes, you know the IA or IAR must register there. If the answer is no, move on to the second question: “Has the IA or IAR had more than five non-institutional clients in the state during the preceding twelve months?” If the answer is yes, they must register in the state; if the answer is no, they don’t need to register in the state.    

Here’s another flowchart to help you with this type of question:

 

Remember that if an investment adviser registers with the SEC, it is a federal covered adviser and does not need to register in any state. Instead, a federal covered adviser must notice file to provide investment advice to residents of that state. When it comes to notice filing requirements for federal covered advisers, follow the same thought process as that described above. If the federal covered adviser has an office in a state, it must notice file there. If it has no office in the state but it has had more than five non-institutional clients in the state in the past twelve months, the firm must also notice file there.  

Practice question

Simple, right? So let’s put the suggested thought process into practice by looking at a question like one you may see on your exam.  

XYZ Broker Dealer has its main office in State A. It also has offices in States B and C. XYZ has non-institutional clients in states A and B, but it only has institutional clients in State C. It does not have an office in State D, but it has three non-institutional clients there. In which states does XYZ need to register? 

A. State A only  

B. States A and B only  

C. States A, B, and C only  

D. States A, B, C, and D  

Remember the process to follow when you see questions about where a BD must register. There are two possible questions to address as part of that process.  

First question: Does the broker-dealer have an office in a state? Answer: XYZ has offices in each of States A, B, and C. Recall that if the answer the first question is “yes, the BD has an office in the state”, then the BD must register in that state. So XYZ needs to register in States A, B, and C.   

If the answer to the first question is no, as it is for State D, you move on to the second question: Does the BD have any non-institutional clients in the state? XYZ has non-institutional clients in State D, so the answer is yes to that question. If the answer to the second question is yes, this means the BD must register in the state. Thus, XYZ has to register in State D as well as States A, B, and C. So Choice D is the correct answer.  

So now you’re an expert, and you’re one step closer to passing your Series 63, Series 65, or Series 66 exam!

Want more exam tips?

Watch a video version of “How to Answer State Registration Questions on the Series 63, Series 65, and Series 66” on the Solomon YouTube channel, where you’ll find even more exam and study tips!

Solomon Exam Prep has helped thousands pass their securities licensing exams, including the SIE and the Series 3, 6, 7, 14, 22, 24, 26, 27, 28, 50, 51, 52, 53, 54, 63, 65, 66, 79, 82 and 99.

New Solomon Exam Prep feature offers Accommodations for Securities Exam Test Takers

Solomon Exam Prep is excited to announce a new feature available to those who require special accommodations from FINRA. Learning disabilities and impairments should never stand in the way of achieving goals Continue reading

Solomon Exam Prep is excited to announce a new feature available to those who require special accommodations from FINRA. Learning disabilities and impairments should never stand in the way of achieving goals, such as passing securities licensing exams. FINRA, in compliance with provisions of the Americans with Disabilities Act (ADA), provide accommodations to support individuals who require certain aids to take their exam.

Accommodations are testing modifications made to exams for individuals with disabilities or learning impairments, which limit one’s ability to take the exam. Where possible, FINRA will make arrangements to facilitate the individual’s needs. These modifications might include additional administration time, a reader or recorder, large print exam booklet, or a private testing room.

In an effort to acknowledge these learning challenges faced by many students, Solomon Exam Prep has introduced an option to allow extra exam time. This will allow Solomon students time and a half while taking timed practice exams in the Solomon Exam Simulator, thereby mirroring what the student’s actual exam will be like with these accommodations.

Solomon Exam Prep is invested in best preparing students for their securities licensing exams. If you think that this feature would be helpful to you in your studies, or if you already have FINRA accommodation approval, please contact Solomon Exam Prep to have this new accommodations feature enabled for your Exam Simulator.

Extra exam administration time is provided by FINRA on a case-by-case basis. Test candidates who wish to request accommodations must submit the appropriate forms to FINRA. For more information, visit the FINRA website here.

Solomon Exam Prep is committed to helping all students pass their securities licensing exams.  

ADHD Study Tips for Securities Exams Like the SIE and Series 7

It’s no small feat to study for and pass a securities exam, especially if you have ADHD. Solomon has compiled a list of strategies to support ADHD learners. Continue reading

Studying for a knowledge test, like a securities licensing exam, requires significant effort over time. Solomon offers some helpful tips for studying and passing your securities licensing exam(s).

Updated June 23, 2022

Study Strategies for People with ADHD

It’s no small feat to study for and pass a securities licensing exam, especially if you have ADHD. Two areas that can be especially challenging for people with ADHD are time management skills and study skills. Time management can be difficult because it requires a person to prioritize tasks, organize their day, and plan for short- and long-term goals, all of which are potential stumbling blocks for those with ADHD. And when it comes to studying, people with ADHD often have trouble concentrating and haven’t acquired effective study habits.

However, studies suggest that people can learn specific behaviors and strategies that help them work around ADHD symptoms and succeed in their studies. With that in mind, Solomon has compiled a list of skill-based strategies to support ADHD learners through the process of studying for their securities licensing exams.

Time Management

If you’re planning to study for a securities licensing exam, such as the Securities Industry Essentials (SIE) exam or the Series 7 or the Series 65, managing your time effectively is crucial. Depending on the exam, Solomon Exam Prep recommends studying for between 30 to 100 hours over the course of ten days to several weeks. It’s a daunting prospect for anyone. How can someone with ADHD get better at managing his or her time?

Use schedules and planners to stay on track.

Whether you use a paper or digital planner, the following tips will help you use it to your advantage:

    • Refer to the Solomon Exam Prep study schedules located in the resources folder of your online Solomon account to help create an effective study plan.
    • Fill in your planner with study targets for each week and smaller goals for each day. People with ADHD often get overwhelmed when confronted with a large task, so breaking the task up into smaller pieces will make it more approachable.
    • Be realistic about how long things take for you and build in some breathing room for when things takes longer than expected. Also build in time for frequent short study breaks.
    • Begin the day by checking your planner to see which activities you need to do. Try to complete each day’s to-do list, but don’t panic if you don’t finish everything – you built in extra time, remember?
Build structure into your day with consistent routines and rituals.
    • Figure out your best time for study. Are you more alert in the morning, afternoon, or evening? Try to study at your optimal time as much as possible.
    • Use alarm clocks, timers, and alerts to help you structure your time, build routine, and remind yourself of important tasks. While your phone can be a source of distraction, this article has a great list of apps for time management.
    • Give yourself small rewards as you study and complete tasks. This article recommends people with ADHD improve their focus by routinely rewarding themselves for achieving small goals. A reward can be as simple as taking a 10–15 minute break to have a snack or take a walk around the block. This also helps prevent fatigue and loss of concentration.

Study Skills

Studying for a securities licensing exam can make you feel like you’ve landed back in high school or college, when you were forced to study and retain large amounts of information with the end goal of passing a test. If you were a successful student, the strategies that worked for you then will probably work for you now. But individuals without prior academic success, and those with ADHD, can increase the effectiveness of their study time by applying the strategies that follow.

Make note-taking a core aspect of your studying.

Studies suggest that becoming a better note-taker can increase concentration and help learners make better use of their time by learning actively rather than passively. Here are some specific ways to boost your studying with note-taking:

    • If you have a hardcopy of your Solomon Exam Prep Study Guide, then highlight, underline, and write notes and questions in the margins as you read. If you’re reading your Study Guide online or listening to your Audiobook, take notes on paper using a note-taking system that works for you, such as the Cornell, outlining, or mapping method, all described here.
    • Use color-coding to organize your notes. Invest in colored pens, highlighters, and sticky notes and use them strategically.
    • Return to your notes frequently: review them several times; rewrite them; read them aloud; create possible test questions from them.
Do A LOT of self-testing.

Studies have found that incorporating more self-testing, or retrieval practice, into a study routine can significantly improve retention of material, especially for people with ADHD. The Solomon Exam Prep study system has two features specifically designed for self-testing:

    • Solomon Exam Prep Online Exam Simulator: with a large question bank and tools that help you identify areas that require more study, the Solomon Exam Simulator is the perfect way to incorporate self-testing into your study time.
    • Solomon Exam Prep Digital Flashcards: interactive true/false and definitions flashcards that can be organized by chapter and customized to target the terms and concepts you need to study more.
Teach the content to someone else.

To be well-prepared for a securities licensing exam, candidates must truly understand the content. What better way to check your understanding than to teach the content to another person? Becoming the teacher to a friend or family member is a highly effective learning technique. This list of study tips for learners with ADHD includes talking about the concepts aloud to yourself or others.

Even if you don’t have a study buddy or captive family member to lecture to, imagine that you’re teaching a course on the material and write up a lesson plan. Deliver your lesson to an empty room if need be, but the act of trying to explain the material out loud is a great way to confirm which areas you have a strong command of and which you need to study further.

More Posts by Solomon Exam Prep

Study Tip for Securities Licensing Exams: Learn by Listening

If you learn best by listening, Solomon Exam Prep Audiobooks offer the perfect way to study for FINRA, NASAA, or MSRB securities exams. Continue reading

Studying for a knowledge test, like a securities licensing exam, requires significant effort over time. Solomon offers some helpful tips for studying and passing your securities licensing exam(s).

Updated July 29, 2022

Solomon Exam Prep Study Guides have helped thousands pass their securities licensing exams because they are written in clear, easy-to-understand language and contain the information you need to know to pass your exam. But what if you don’t enjoy reading or struggle with reading challenges?

If you prefer to learn by listening, Solomon Exam Prep Audiobooks offer the perfect way to study for a securities exam. Solomon audiobooks are complete, verbatim readings of the Solomon Study Guides. They are read by live readers who are experts on the subject matter.

Why an audiobook? One obvious benefit is that you can learn while you’re doing other things, such as commuting, working out, or doing the dishes. Besides the advantage of learning on the go, listening to the audiobook version of your Solomon study guide can benefit your studying in several ways:

Take the reading pressure off

First, you can learn the content without the additional work of reading. For many people, it’s easier to process and comprehend auditory words than written ones. And some people simply dislike reading or haven’t developed a habit of doing it, thereby making it a chore to sit down and read intensively.

Listening can be more accessible 

Second, audiobooks can help to address a range of diverse study needs. If you’re visually impaired or have a learning disorder such as dyslexia or ADHD, you may find it much easier to learn from an audiobook. In fact, audiobooks are the preferred choice for people with dyslexia because they allow the learner to get the meaning of the text while avoiding the challenge of decoding written language.

In addition, listening to an audiobook while reading can help people with ADHD because the audiobook helps to focus the mind on the material. In fact, according to the Harvard Health Letter, listening to an audiobook can help people who are having difficulty with traditional reading due to reasons such as stress and anxiety by helping them focus.

Listening vs. reading

But is listening to an audiobook as effective for studying as traditional reading? Psychology professor Daniel T. Willingham points out in one article that learning from written texts does have some advantages over learning from audiobooks. For example, the ability to see visual cues like headings and paragraph divisions, and the ability to reread sentences can all help with comprehension.

The good news is that the auditory cues present in audiobooks may be equally beneficial for comprehension. For example, the tone and inflection of the reader’s voice can tell us a lot about the meaning of a sentence. In fact, at least one study suggests that for adults, comprehension is similar for reading and listening.

Maximize your learning

Finally, if you’re someone who enjoys reading, then an audiobook is a great way to reinforce the material in an additional modality by listening while you read. According to one article, multisensory learning – when more than one sense engages with the same information – can result in better retention of new material. In other words, using more than one sense to learn (e.g., reading and listening) has been shown to be more effective than using only one sense (e.g., just reading).

Final Thoughts

It’s clear that there are many reasons why an audiobook can boost your studying. At the very least, listening to an audiobook gives your tired eyes a rest after a long day of focusing on a computer screen. And it might turn out to be an invaluable study tool, allowing you to sidestep reading challenges and maximize your study time.

To hear samples of Solomon Audiobooks for the Securities Industry Essentials (SIE) exam, Series 7 exam, and more, visit the Solomon website. Look for Audio Samples under the Learn More tab.

16 Study-From-Home Tips From Solomon Exam Prep

Get both general home-study tips and specific home-study tips for securities exams. Continue reading

GENERAL HOME-STUDY TIPS

  • Find a quiet place that you feel comfortable in – try to study in this same place every day
  • Unless you’re using your phone to study with, put the phone in another room.
  • Wake up early – getting started is the hardest part, and starting in the morning will make studying easier. You will get in several hours before you know it.
  • Make small goals.
  • Reward yourself – try to get up and walk around at least every 30 minutes. This will rest your eyes and mind.
  • If you start to feel anxious – take a deep breath, counting to four as you inhale, then slowly exhale, counting to seven as you exhale. Repeat. This will lower your anxiety. This is a good strategy to use before your exam.
  • Ask for help being accountable: find someone in your life to query you every day about what you have accomplished.
  • Go for a walk in a natural or green setting.  Studies show that your mind relaxes and you remember more if you take regular walks in a natural or green setting. 
  • Get a good night’s sleep – try to go to sleep at the same time each night and wake up at the same time. 

SPECIFIC HOME-STUDY TIPS FOR SECURITIES EXAMS

  • Read the Solomon Study Guide. Remember: the number one reason people fail their securities exam is they didn’t read the Study Guide.
  • If you’re having trouble reading the Study Guide, listen to the Solomon Audio Guide while you read the Study Guide.  
  • Read Exam Notes in the Resources folder.
  • If you don’t understand a question or concept, email Solomon’s Ask the Professor.
  • If you’re having trouble with something, create note cards and try to teach it to someone else. Becoming the teacher is the most effective tool to learn something you find challenging or difficult.
  • After reading the Solomon Study Guide, take at least six practice exams in the Solomon Exam Simulator.  
  • Use Interactive Review to review the Exam Simulator questions you get incorrect.

Solomon Exam Prep has helped thousands pass the SIE and the Series 3, 6, 7, 14, 22, 24, 26, 27, 28, 50, 51, 52, 53, 54, 63, 65, 66, 79, 82 and 99.  For more information, go to www.SolomonExamPrep.Com or call 503.601.0212.

The FINRA Series 22: Basic Exam Preparation

Get answers to some of your burning Series 22 questions from Jeremy Solomon, Solomon Exam Prep owner and president, plus test day tips! Continue reading

Did you know that the FINRA Series 22 exam is a much easier path to becoming a direct participation program representative than the Series 7?  A shorter exam requiring less study time, and you’re on your way to being qualified to solicit and sell interests in DPPs, including real estate, oil and gas, equipment leasing, BDCs, agricultural, like-kind exchanges, etc.

Click on the video link above and get answers to some of your burning Series 22 questions from Jeremy Solomon, Solomon Exam Prep owner and president, plus test day tips!

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.

Series 7 exam options questions tips

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.

Read a Solomon Exam Guide … and Live Longer

When you’re preparing for a securities exam, and you read a Solomon Exam Prep textbook, not only are you improving your chances of passing, but you’re also improving your odds of living longer. According to a new study published in Social Science & Medicine: Continue reading

When you’re preparing for a securities exam, and you read a Solomon Exam Prep textbook, not only are you improving your chances of passing, but you’re also improving your odds of living longer. According to a new study published in Social Science & Medicine:

  • On average, book readers live 23 months longer than individuals who don’t read books.
  • Books are protective regardless of gender, wealth, education, or health.

The authors Avni Bavishi, Martin Slade and Becca Levy write that there are two cognitive processes involved in reading books that could create a “survival advantage”. First, reading books promote the “slow, immersive process” of “deep reading,” a cognitive engagement that “occurs as the reader draws connections to other parts of the material, finds applications to the outside world, and asks questions about the content presented.”

“Cognitive engagement may explain why vocabulary, reasoning, concentration, and critical thinking skills are improved by exposure to books,” they write. Second, books “can promote empathy, social perception, and emotional intelligence, which are cognitive processes that can lead to greater survival,” they say.

In addition to improving their chances of living longer, securities exam students are likelier to pass and pass with a higher score, if they read an exam guide, according to Jeremy Solomon, president of Solomon Exam Prep.

How to Pass Your Exam the First Time

One question everyone asks when encountering any exam is: “How do I pass the first time?” Here is a list of our top 5 study tips, along with an entertaining short video to help drive them home. Continue reading

testOne question everyone asks when encountering any exam is: “How do I pass the first time?” Solomon Exam Prep has been helping their students pass securities exams for over a decade.  For many years Professor Karen Solomon (PhD, University of Chicago) taught and researched how the brain learns and memorizes information. Based on her research, Solomon Exam Prep has come up with some tried and true study tips that will help you pass your exam the first time.

The first thing to remember is that the over-studiers are more likely to succeed. There are many costs associated with taking these exams, so it is in your best financial interest to pass the first time. Increase your chances of passing the first time by following Solomon Exam Prep’s suggested study schedule; you will thank yourself later.

Here is a list of our top 5 study tips, along with an entertaining short video to help drive them home:

  1. Reinforce learning by engaging multiple senses. You want to learn the content, not just memorize it. Reinforce your reading by following along with the Audiobook or reading out loud to yourself. By engaging your other senses, you are more likely to remember the content. We also recommend reading your Study Guide multiple times as you do not always retain everything the first time around. The combination of repeated reading and engaging other senses is sure to drive home the material and increase memory retention.
  2. Make your own flash cards. Many other companies create and sell flash cards, but Solomon Exam Prep does not. Why? To help you better learn the material. When you actively sit down and create your own flashcards, you are more likely to recall the information. This goes along with engaging multiple senses; reading and transcribing the content you find important helps to reinforce learning.  We encourage all of our students to create their own flash cards.
  3. Take practice quizzes. Practice makes perfect! You will not know how much material you have retained until you take practice exams. We encourage our students to take quizzes after every chapter they read. Focus on learning the content and avoid memorizing the questions. Review the rationales for any incorrect answers; not everything may be in the book, so make sure you pay attention to new material in the quizzes. As you approach your exam date, you should be taking full, timed practice exams to best prepare for the actual one. We highly encourage our students to average in the mid 80’s before sitting for the exam.
  4. Take breaks and rest up. It is important to give yourself a break as you are studying. You might try setting a timer to remind yourself to take a break. (It does not help to cram.) Remember: Sleep is important! Before your exam date, make sure you get enough sleep; do not stay up all night cramming. Your brain functions much better when it is well rested.
  5. Review your Study Course and notes. If you have a recorded class, re-watch it prior to your test date; this is a great review.  If you do not have a recorded class, go over your notes and flash cards prior to your exam. You can also re-review your last full exam, taking note of any questions you might have answered incorrectly. This serves as a great final refresher before your exam.

Follow these study tips and you will increase your chances of passing the first time. Be sure to check out our study tips video: