Wednesday, August 11, 2010

Options orders

Many of the options questions on the Series 7 have nothing to do with numbers.
Like this:

If one of your investing clients wrote put options a few weeks ago and would now like to liquidate the position, you would enter which of the following orders on his behalf?
A. opening sale
B. closing sale
C. closing purchase
D. opening purchase

EXPLANATION: a registered rep could really mess things up by checking off the wrong box among the four choices above. For example, if your customer wanted to buy call options, you could really do damage if you checked "opening sale" when you meant "opening purchase." Suddenly, because of your mistake, the guy is subject to huge and even unlimited losses by writing naked calls. A "long" position is initiated with an opening purchase. A short position is initiated with an opening sale. Here, the client has written options, so he's already done an opening sale. He needs to close out by buying them back--closing purchase. Some students will read this explanation and think, "Okay, I have to memorize these four things." To which I would say, "No. You have to understand them." If you understand the concepts surrounding options, you will get 90% or more of those questions right on the exam. Which is a good thing.


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