Rice Option contracts offer investors security and the Series 7 will expect you to be able to determine the maximum gain and loss for these. When an investor purchases or sells option contracts on securities she owns, that investor is choosing an excellent way to protect against loss or to bring additional funds into her account.
The most common form is when an investor sells covered call options. Loss option an investor is selling a call option against a security that she owns, loss option investor is considered to be covered. Place the purchases and sales in the options chart.
Placing the two transactions in this case the stock purchase and the option sale in the options chart helps you calculate the maximum gain as well as the maximum loss. To find the maximum gain, you need to exercise the option.
You always exercise at the strike price, which in this case is When the investor is covered, finding the break-even point is nice and easy for stock and options. First, look at how much the investor paid for the stock; then look at how much more she paid or received for the option. If the investor sold twice sold short the stock and sold an optionadd the stock price and the premium.
If the investor had one buy and one sell for example, bought the stock and sold the option or sold short the stock and bought the optionsubtract the premium from the stock price. The following example tests your knowledge on stock and option problems.
What is Mr. You need to enter the initial purchase and sale into the options chart. Your friend and client, Mr.
Because Mr. Next, Mr. Bullwork purchased a DIM Aug 30 call to hedge protect his position in case the stock started increasing in value.
Options and Stop Losses Question - Options and Stop Losses Regarding options and stop losses, what's the best way to establish stop loss protection when option trading? Should it be based on the price of the options or should it be based on the price of the related stock? Answer Great question, and one that doesn't get addressed often enough. First, there are a number of drawbacks to trying to set up a stop loss based on the fluctuating price of an option.
Stop and take a look to see whether that calculation answers the question. You see more Money In at this point than Money Out, so you have a maximum gain; therefore, you have to exercise the option to get the answer you need.
Make sure you exercise the option at the strike price. Total up the two sides, and you see that the maximum potential loss for Mr.