Selling Index Calls Explained

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Put and Call Writing Explained

Learn how to sell calls and puts

Making money in any type of market can be an extremely trying proposition. You’ve got to pick the right stock, pick the right options — oh, and you’re timing also has to be right.

Considering how many components are involved with a successful trade, i.e., how many things you have to get right, why not take greater control of the variables by writing your own ticket?

Writing your own ticket involves writing put and call options. And though the goal of put writing versus call writing is different in a strategic sense, the ultimate goal of increasing your overall gains — along with your overall wealth — is one and the same.

Let’s take a look at how we can make money writing puts, and then we’ll take a look at how to do the same by writing calls.

‘Put’-tin on the Ritz: Writing Put Options

You often hear about a public company making the move to repurchase a block of its own shares on the open market. This is good for shareholders because it reduces the number of shares outstanding, while typically boosting the value of existing shares. It also increases a company’s earnings per share.

When PC moguls Bill Gates and Michael Dell wanted to do a share-buyback program for their respective empires, they took advantage of the options markets to increase the return on their investment. What they did was write (or sell) put options, and by doing so they created a win-win situation with their stock performance.

How was this accomplished?

Well, when put contracts are written, if the stock goes down in value then the shares are “put” to the writer (i.e., to buy from the owner of the shares). But if the market price spikes, as the person who has shorted the puts, you get to keep the premium you collected when you initiated the position (as “selling to open” an options position oftentimes results in an initial credit to your trading account).

Either way, it’s better for the shareholders of a company participating in a buyback because it ultimately means that the company is purchasing its stock back at lower prices, thus increasing the return on the investment for the company and, in turn, its shareholders.

Of course, writing puts isn’t just for the big guys. Individual traders can use this technique to enter into a long stock position.

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Just keep in mind that when you’re selling a put option, you don’t expect the stock price to drop below the exercise (or strike) price, nor to increase significantly. That way, if the option owner assigns you to buy the stock, you will do so at the strike price of the option.

So if a stock is trading for $25 and you short a $22.50 put, if the share price dips to $22.50 and the option holder “puts” that stock to you, then they’ve saved you the legwork of making the purchase and you’re now the owner of the stock you were planning to buy anyway.

The ‘Call’ of the Wild: Writing Call Options

Often investors cite their fear of risk as the reason why they might shy away from trading options. And while the level of risk can increase with some of the more complicated options strategies out there, that’s not the case with writing covered calls.

In fact, writing covered calls is one of the most frequently used and safest options strategies, because it is one of the most conservative plays a trader can make.

On the surface, writing covered calls seems like hitting a home run. Also known as a “buy-write,” this strategy involves selling call options against stock that you already hold long.

When you sell an option, you immediately collect a premium up front, and because options settle in one business day, the credit you collect hits your trading account a day later. It’s like you get to make money just because you decide to.

Suppose you’re sitting on 1,000 shares of the hypothetical XYZ Corp. with the stock currently trading at $34. Suppose the shares are trading pretty steadily and haven’t made a significant jump in a while.

Instead of waiting around and hoping for the stock to receive its own version of a stimulus package, you can take the opportunity to sell calls at the $35 strike against your position.

Let’s say the XYZ Oct 35 Calls trade at $1.95 per share. That’s $195 per contract, and as one contract covers 100 shares, you can sell a 10-lot, or 10 contracts, for $1,950, so that’s the amount of money that you would take in by selling your calls.

Why the XYZ Oct 35 Calls? Well, for two reasons.

One, the strike price is higher than the current market value, which means that you are agreeing to sell your shares for $35 each should the buyer wish to exercise his or her right to buy the stock (i.e., call it away from you). This means that in addition to the $1,950 that you took in, you’d be selling the shares for $1 more than the level where they’re currently trading.

Two, insofar as choosing the October calls, their expiration date is far enough away that if you are expecting the stock to move up (so that the options become more valuable), you’re giving yourself enough time to be right.

But what if the stock doesn’t go up to, or through, that $35 strike by that third Friday in October?

Well, then you’d keep your premium money — as well as your stock — because the option buyer wouldn’t want to call the shares away from you at a cost that’s above the market price. His or her option would likely expire worthless.

Owning stock and selling covered calls against it is like having an apartment building and collecting rent on the available units. If you can’t find tenants or just haven’t gotten around to renovating a perfectly usable space, then you’re not making any money. And in neutral markets, not collecting “rent” with options trading means you could be passing up a lot of gains that you might never see by just holding on to the stock and playing the waiting game.

Unit 2 Other Securities

Термины в модуле (62)

A) remain the same.
B) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace.
C) decrease.
D) increase.

Click for Answer and Explanation
Answer: A

Since the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.

A) GNMAs
B) Short-term municipal notes
C) Preferred stock mutual fund
D) Tax-exempt unit investment trusts

Click for Answer and Explanation
Answer: D

The key word here is “diversify”. Tax-exempt unit investment trusts will own a number of different tax-exempt municipal issues. Short-term municipal notes, although paying tax-free interest, will not offer as high a return due to the short maturities and do not indicate that there is diversification as to issuers.

A) When an open-end investment company, or mutual fund, registers its offering with the SEC, it does not specify the exact number of shares it intends to issue.
B) An investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares or, if the investor prefers, open-end redeemable shares.
C) The Investment Company Act of 1940 classifies investment companies into three types: face-amount certificate companies, unit investment trusts, and management investment companies.
D) When investors sell or redeem their open-end fund shares, they receive the net asset value (NAV) as of the close of the day the order was issued.

Click for Answer and Explanation
Answer: B

A) diversification.
B) regulation.
C) management.
D) capitalization.

Click for Answer and Explanation
Answer: D

A) Unit investment trust unit.
B) Face-amount certificate.
C) Closed-end company share.
D) Open-end company share.

Click for Answer and Explanation
Answer: C

The market determines the offer price of closed-end company shares; the offer price may be either more or less than the NAV. Because the NAV in this situation is 90% of the offer price, this must be a closed-end share. An open-end share’s NAV must be at least 91.5% of its offered price because the maximum sales charge on open-end shares is 8.5% of the POP.

A) open-end companies may issue common stock only.
B) it is unnecessary for the prospectus to disclose the management fee.
C) an investment company must have $5 million capital before its securities can be offered to the public.
D) no more than 50% of the board of directors of an investment company may be officers or employees of the company or investment advisers to the company.

Click for Answer and Explanation
Answer: A

Open-end companies may issue only common stock. The prospectus must state the management fee, and an investment company needs only $100,000 to offer itself to the public. In addition, no more than 60% of the board of directors can be made up of officers or employees of the company.

prospectus states management fee

only $100,000 required to offer to public

A) Investments are limited to securities with remaining maturities of 397 days or less, with the average portfolio maturity not to exceed 90 days.
B) Investments are limited to eligible securities determined to have minimal risk.
C) The prospectus must prominently indicate that the U.S. government does not guarantee the fund and that there is no guarantee that the NAV will be maintained.
D) No more than five percent of the funds assets may be invested in below-investment grade securities.

Click for Answer and Explanation
Answer: D

The SEC requires that money market mutual funds’ investments be limited to securities that are rated in the top-2 ratings categories by the nationally recognized rating services (e.g., Moody’s, Standard & Poor’s). Investment in below-investment grade securities is not allowed.

A) fund has made dividend distributions to shareholders.
B) securities in the portfolio have appreciated in value.
C) issuers of securities in the portfolio have made dividend distributions.
D) fund has experienced net redemptions of shares.

Click for Answer and Explanation
Answer: A

If dividends are distributed to shareholders, the fund’s assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, as the money paid out is offset by a reduced number of shares outstanding.

NAV will increase if portfolio increases and dividends paid to portfolio.

NAV will increase if issuers make distributions to the portfolio.

A) remain unchanged.
B) It cannot be determined from the information given.
C) increase.
D) decrease.

Click for Answer and Explanation
Answer: C

A) redeem their shares on request
B) publish their management fees
C) meet the 75-5-10 diversification test
D) issue shares with voting privileges

Click for Answer and Explanation
Answer: C

​Open-end investment companies, (mutual funds),​ may be classified as diversified or non-diversified depending on their stated objectives. ​It is only those which are diversified that must comply with the 75-5-10 rule. ​However, mutual funds must issue shares with voting privileges, redeem their shares on request, and publish their management fees.

redeem shares on request
publish management fees
issue shares with voting privileges

A) out-of-the-money.
B) at-the-money.
C) in-the-money.
D) at breakeven.

Click for Answer and Explanation
Answer: A

This put option has a zero intrinsic value and is therefore out-of-the-money by the $5 difference by which the market price exceeds the strike price. A put option has intrinsic value or is in-the-money when the current market price of the underlying asset is less than the exercise price (in this example, $70).

An option is in-the-money if, disregarding the premium paid, exercising the option would be profitable.
If the owner of an option does not exercise the option, the option will eventually expire.
If an option expires, the holder loses only the premium the holder paid for the option.
A) I and II.
B) I and III.
C) II and III.
D) I, II and III.

Click for Answer and Explanation
Answer: D

When conditions are such that exercising an option, without regard to any premium paid, would be profitable, the option is said to be in-the-money. An option will eventually expire if the owner does not exercise it. In that case, the owner’s losses are limited to the amount paid for the option, known as the premium.

disregarding premium, exercised option is profitable

will expire if not exercised

The option buyer is looking for market volatility.
The option buyer is looking for market stability.
The option seller is looking for market volatility.
The option seller is looking for market stability.
A) II and III.
B) II and IV.
C) I and IV.
D) I and III.

Click for Answer and Explanation
Answer: C

combination of a put and a call on the same stock, with the same trike prices and expiration dates.

option buyers need price movement

option sellers need price stability

in a straddle: buyer expects sharp movement does not know direction

A) stock index future.
B) put option.
C) call option.
D) currency swap.

Click for Answer and Explanation
Answer: B

A) buy a call.
B) buy a put.
C) sell a call.
D) sell a put.

Click for Answer and Explanation
Answer: C

SELL A CALL: generates additional income.

WRITE A PUT: additional income from the position but must be willing to increase his position if exercised

BUY A CALL: speculating the stock will rise dramatically.

A) Short 2 XYZ uncovered calls.
B) Short 200 shares of XYZ and short 2 XYZ puts.
C) Short 2 XYZ uncovered puts.
D) Short 200 shares of XYZ.

Click for Answer and Explanation
Answer: C

short 2 uncovered puts

put writer loses money if stock goes down, but only to zero.

A) Writing naked calls.
B) Buying calls.
C) Writing naked puts.
D) Buying a put.

Click for Answer and Explanation
Answer: A

Writing naked calls provides unlimited liability and the most risk. Buying a call would be an attractive strategy in a bull market with risk limited to calls paid. Writing naked puts risks only the difference between the strike price and zero, less any premium received. Buying a put is a bearish strategy with risk limited to the amount paid for the put.

writing naked calls

unlimited liability, the most risk.

Buying a call in a bull market: risk limited to calls paid.

writing naked puts risks only the difference between the strike price and zero less premium received.

A) Writing 5 straddles.
B) Buying 5 puts on the stock.
C) Buying 5 calls on the stock.
D) Writing 5 puts on the stock.

Click for Answer and Explanation
Answer: B

put gives investor right to see stock at a set price, protects against losses below strike price

buying calls protects short position
buying calls for a long position increases leverage and risk

A) enter a buy stop order.
B) buy a put.
C) buy a call.
D) enter a sell limit order.

Click for Answer and Explanation
Answer: B

A) writing calls and selling puts.
B) buying calls.
C) shorting the same stock.
D) buying puts.

Click for Answer and Explanation
Answer: D

BUY A PUT close to the stock’s purchase price

should the stock go below the strike, the investor can exercise the put at the strike price.

SELL A PUT: increases downside risk

BUY A CALL: increases downside risk, a bullish strategy

A) Buy a call.
B) Buy a put.
C) Sell a put.
D) Sell a call.

Click for Answer and Explanation
Answer: A

A) Sell S&P 500 index puts.
B) Buy S&P 500 index puts.
C) Buy S&P 500 index calls.
D) Sell S&P 500 index calls.

Click for Answer and Explanation
Answer: B

In a defined benefit plan, the corporation is assuming the investment risk. Regardless of the security, the best way to protect a long position is to buy a put, either on that security or an index with a close correlation. In this case, with a portfolio of large-cap stocks, the S&P 500 index would seem to be the appropriate option to use.

A) income.
B) limited downside protection when long the underlying asset.
C) hedging.
D) maximum protection against loss.

Click for Answer and Explanation
Answer: D

INCOME
HEDGING
LIMITED DOWNSIDE PROTECTION WHEN LONG

A) sell S&P 500 index calls.
B) sell S&P 500 index puts.
C) buy S&P 500 index puts.
D) buy S&P 500 index calls.

Click for Answer and Explanation
Answer: C

A portfolio manager who expects a decline in the market as a result of a trade war (or any factor that might hurt stock prices) would buy puts on a broad market index such as the S&P 500 to protect his position. Selling calls limits upside potential, and only protects the portfolio to the extent of the income received from the sale of the calls.

Forward contracts
Futures contracts
Hedge funds
REITs
A) I, II, and IV
B) I and II
C) I and IV
D) I, II, and III

Click for Answer and Explanation
Answer: B

FOWARD CONTRACTS
FUTURE CONTRACTS

A) ETFs.
B) Forward contracts.
C) Futures contracts.
D) Options.

Click for Answer and Explanation
Answer: B

leverage.
increased income.
unlimited potential gain.
protection against loss.
A) I, III and IV.
B) III and IV.
C) I and II.
D) I, II, III and IV.

Click for Answer and Explanation
Answer: A

Any derivative offers the benefit of a small dollar outlay controlling a large investment (leverage). In the case of call options or some other long derivative positions, the gain potential is theoretically unlimited. The purchase of options and certain other derivatives can offer protection against loss. But, in order to generate income, you must sell the derivative, not buy.

UNLIMITED POTENTIAL GAIN

PROTECTION AGAINST LOSS

liquidity.
creditworthiness of the buyer.
lack of assurance that the delivery price will remain stable.
the location for the delivery may change.
A) III and IV.
B) I and IV.
C) II and III.
D) I and II.

Click for Answer and Explanation
Answer: D

A) it can only be exercised on the expiration date.
B) intrinsic value does not affect the premium.
C) the currency used is generally something other than the U.S. dollar.
D) its value is based on some underlying asset.

Click for Answer and Explanation
Answer: D

A) Purchasing a call.
B) Selling a call.
C) Selling a put.
D) Purchasing a put.

Click for Answer and Explanation
Answer: C

OBLIGATED TO BUY THE STOCK THAT IS PUT TO YOU

CALL – OBLIGATION TO SELL STOCK THAT IS CALLED AWAY FROM YOU

A) Owning a long call on stock you already own offers a hedge against a market decline.
B) This would generate additional income.
C) To fix the cost of acquiring additional stock to the portfolio.
D) To complete the other side of a spread.

Click for Answer and Explanation
Answer: C

CLIENT BULLISH ON STOCK W/O FUNDS TO PURCHASE STOCK CAN LOCK IN FUTURE COST BY GOING LONG ON A CALL.

INCOME GENERATED THROUGH SELLING OPTIONS.

A) obtain income.
B) protect the premium.
C) fix the purchase price to add stock to his portfolio.
D) seek long-term capital gain.

Click for Answer and Explanation
Answer: A

SHORT TERM GAINS

A) obtain income from the premium.
B) protect against an increase in the market price of XYZ stock.
C) protect against a decrease in the market price of XYZ stock.
D) hedge the long position.

Click for Answer and Explanation
Answer: B

PROTECT AGAINST AN INCREASE IN THE MARKET PRICE

GOING LONG ONLY MEANS THAT YOU HAVE BOUGHT THE STOCK.

IF YOU WISH TO HEDGE, BUY A PUT.

BUYING A CALL IS BULLISH.

Click for Answer and Explanation
Answer: A

GROWTH TREATED AS ORDINARY INCOME

PORTION ATTRIBUTED TO GROWTH TREATED AS ORDINARY INCOME

9000$ OF GROWTH X 38% (28% + 10% PENALTY)

The number of annuity units is fixed when payout begins.
The value of accumulation units is fixed at purchase.
The monthly annuity payment is a variable amount.
The annuity payments are not subject to income taxes.
A) III and IV.
B) I and III.
C) I and II.
D) II and III.

Click for Answer and Explanation
Answer: B

The number of annuity units is fixed when an annuitant starts the payout process, and the monthly payment will vary with the market value of the securities in the separate account portfolio. The value of accumulation units varies with the value of the portfolio, and the growth portion of the monthly payments is subject to income tax.

NUMBER OF ANNUITY UNITES FIXED WHEN PAYOUT BEGINS

A) value of the securities in the general account of the insurance company.
B) number of accumulation units owned multiplied by the value of each unit.
C) total payments made by the evaluation date.
D) number of accumulation units owned multiplied by the number of payments made into the account.

Click for Answer and Explanation
Answer: B

DURING THE PAYIN/ACCUMULATION PHASE:

VALUE OF ACCUMULATION UNITS X NUMBER OF UNITS OWNED BY INVESTOR

A) receive monthly payment for a defined period and then two years later change the contract to payment for life.
B) receive the benefits on a monthly basis until the time of death.
C) receive the benefits for life with a certain minimum period of time guaranteed.
D) have a joint life with last survivor clause, with payments paid, until the death of the last survivor.

Click for Answer and Explanation
Answer: A

CANNOT RECEIVE MONTHY PAYMENTS AND THEN TWO YEARS LATER CHANGE THE CONTRACT TO PAYMENT FOR LIFE.

ONCE ANNUITIZED, OWNER NO LONGER HAS CONTROL OVER ASSET.

correlate to a specific index.
sell short.
be bought and sold on margin.
represent an entire portfolio, or basket of securities.
A) I and IV.
B) II and III.
C) III and IV.
D) I and II.
Your answer, I and II., was incorrect. The correct answer was: II and III.

A) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee.
B) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee.
C) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee.
D) decline the transaction because short-term trading of funds is not allowed.
Your answer, buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee., was incorrect. The correct answer was: buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee.

A) 9% per premium payment.
B) 8.5% of total premiums over the life of the plan.
C) 8.5% per premium payment.
D) 9%.
Your answer, 8.5% per premium payment., was incorrect. The correct answer was: 9%.

A) a pension plan trustee.
B) an investment club.
C) an investor in an individual retirement account.
D) a husband and wife in a joint account.
Your answer, a husband and wife in a joint account., was incorrect. The correct answer was: an investment club.

A) The investment no longer qualifies for a breakpoint.
B) Shares held in escrow will be liquidated at the appreciated value.
C) The letter of intent is considered fulfilled.
D) The agent should remind the customer of the letter of intent that was signed 12 months ago.
Your answer, The letter of intent is considered fulfilled., was incorrect. The correct answer was: The agent should remind the customer of the letter of intent that was signed 12 months ago.

A) Variable annuity.
B) Fixed annuity.
C) Common stock.
D) REIT.
Your answer, Fixed annuity., was incorrect. The correct answer was: Variable annuity.

Class A shares have a front end sales charge and a low 12b-1 fee.
Class B shares have a declining contingent deferred sales charge and a high 12b-1 fee.
Class C shares have a high 12b-1 fee and a level contingent deferred sales charge.
Class B and C shares allow investors to put the shares back to the fund for their original purchase price for up to 1 year after purchase.
A) I and II.
B) I, II and III.
C) I only.
D) I, II, III and IV.
Your answer, I, II and III., was correct!.

The option buyer is looking for market volatility.
The option buyer is looking for market stability.
The option seller is looking for market volatility.
The option seller is looking for market stability.
A) II and III.
B) II and IV.
C) I and III.
D) I and IV.
Your answer, I and IV., was correct!.

A) $10.65, less redemption fee, if any.
B) $10.65, less commission.
C) $10.65.
D) $11.15, less redemption fee, if any.
Your answer, $10.65, less redemption fee, if any., was correct!.

A) obtain income from the premium.
B) hedge the long position.
C) protect against a decrease in the market price of XYZ stock.
D) protect against an increase in the market price of XYZ stock.
Your answer, protect against a decrease in the market price of XYZ stock., was incorrect. The correct answer was: protect against an increase in the market price of XYZ stock.

A) $2,520.00
B) $3,420.00
C) $0.00
D) $4,480.00
Your answer, $2,520.00, was incorrect. The correct answer was: $3,420.00

28% tax on earnings
plus
10% penalty

A) protective put.
B) long call.
C) straddle.
D) short call.
Your answer, straddle., was correct!.

if investor purchases both options–long straddle

Backed by money market deposits.
Negotiated maturities and yields.
Issued by insurance companies.
Not registered with the SEC.
A) II and IV.
B) III and IV.
C) I and III.
D) I and II.
Your answer, I and II., was incorrect. The correct answer was: II and IV.

yield and maturity are open to negotiation

A) semiannually.
B) annually.
C) monthly.
D) weekly.
Your answer, monthly., was incorrect. The correct answer was: annually.

Rights of accumulation.
The privilege to exchange shares of this fund with other GEMCO funds at NAV.
Price breakpoints offering reduced commissions for larger purchases.
A) I and III.
B) II and III.
C) I and II.
D) I, II and III.
Your answer, I, II and III., was incorrect. The correct answer was: I and III.

The sale of securities from the portfolio.
Automatic reinvestment of dividends by the shareholders.
Market appreciation of portfolio securities.
Market decline in the value of portfolio securities.
A) I, III and IV.
B) I, II, III and IV.
C) III and IV.
D) I and II.
Your answer, I, II, III and IV., was incorrect. The correct answer was: III and IV.

assets minus liabilities divided by shares outstanding

sale of securities is replaced by cash and has no effect on NAV

reinvestment of dividends will also not affect the NAV
shares going out are offset equally by the cash coming in

market appreciation or decline will affect NAV

A) He must sign a new letter for the $2,000 to receive the breakpoint.
B) He has 90 days to invest the additional $2,000 for the breakpoint.
C) There are no additional requirements; he will receive the breakpoint.
D) The fund will liquidate shares to meet the additional sales charge.
Your answer, He must sign a new letter for the $2,000 to receive the breakpoint., was incorrect. The correct answer was: The fund will liquidate shares to meet the additional sales charge.

A) exempt from federal income tax for the interest payments received by the bondholders.
B) available to investors through a minimum purchase of $5,000.
C) a direct obligation of the US government.
D) backed exclusively by a pool of mortgages.
Your answer, backed exclusively by a pool of mortgages., was incorrect. The correct answer was: a direct obligation of the US government.

A) has the right to buy 100 shares at the stated exercise price
B) has the right to sell 100 shares at the higher of the exercise or market price
C) has the right to buy 100 shares at the lower of the exercise or market price
D) has the right to sell 100 shares at the stated exercise price
Your answer, has the right to buy 100 shares at the stated exercise price, was incorrect. The correct answer was: has the right to sell 100 shares at the stated exercise price

A) The offering price, plus the redemption fee.
B) The offering price, minus the redemption fee.
C) The NAV, plus the redemption fee.
D) The NAV, minus the redemption fee.
Your answer, The NAV, plus the redemption fee., was incorrect. The correct answer was: The NAV, minus the redemption fee.

A) the policy is guaranteed never to lapse.
B) ability to change death benefit amount.
C) when the cash value is sufficient, no premium payment is required.
D) ability to adjust the amount of premium payments.
Your answer, ability to change death benefit amount., was incorrect. The correct answer was: the policy is guaranteed never to lapse.

A) AA corporate bond with 7 years to maturity.
B) Corporate bond fund.
C) Zero-coupon bond with 15 years to maturity.
D) Zero-coupon bond with 5 years to maturity.
Your answer, Corporate bond fund., was incorrect. The correct answer was: Zero-coupon bond with 15 years to maturity.

A) Holders of mortgage bonds
B) Employee wages earned within the 180 days prior to the bankruptcy filing
C) Holder of first lien, senior preferred stock
D) Property taxes owed to the city of Springfield
Your answer, Holders of mortgage bonds, was incorrect. The correct answer was: Employee wages earned within the 180 days prior to the bankruptcy filing

employee wages within 180 days of filing

A) Investments are limited to eligible securities determined to have minimal risk.
B) The prospectus must prominently indicate that the U.S. government does not guarantee the fund and that there is no guarantee that the NAV will be maintained.
C) No more than five percent of the funds assets may be invested in below-investment grade securities.
D) Investments are limited to securities with remaining maturities of 397 days or less, with the average portfolio maturity not to exceed 90 days.
Your answer, Investments are limited to securities with remaining maturities of 397 days or less, with the average portfolio maturity not to exceed 90 days., was incorrect. The correct answer was: No more than five percent of the funds assets may be invested in below-investment grade securities.

397 days or less
average portfolio maturity not to exceed 90 days

must be rated in top-2 ratings categories by Moody’s or Standard & Poor’s

A) He can expect to make a profit whether the markets trend up or trend down.
B) These funds purchase a large amount of preferred stock.
C) Expenses for these funds tend to be higher than those for other funds.
D) Shares of these funds are easy to redeem.
Your answer, He can expect to make a profit whether the markets trend up or trend down., was incorrect. The correct answer was: Expenses for these funds tend to be higher than those for other funds.

Short Call Strategy Explained – Online Option Trading

Short Call Strategy:

What is Short Call strategy?

A Short Call means selling of a call option where you are obliged to buy the underlying asset at a fixed price in the future. This strategy has limited profit potential if the stock trades below the strike price sold and it is exposed to higher risk if the stock goes up above the strike price sold.

When to initiate a Short Call?

A Short Call is best used when you expect the underlying asset to fall moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of Call option will reduce over a period of time as you reach near to expiry. This is a good strategy to use because it gives you upfront credit, which will help you to somewhat offset the margin. But by initiating this position you are exposed to potentially unlimited losses if underlying assets goes dramatically high in price.

How to construct a Short Call?

A Short Call can be created by selling 1 ITM/ATM/OTM call of the same underlying asset with the same expiry. Strike price can be customized as per the convenience of the trader.

Short Call Option

Neutral to Bearish

Earn income from selling premium

Breakeven at expiry

Strike price + Premium received

Limited to premium received

Let’s try to understand with an Example:

NIFTY Current market Price

Sell ATM Call (Strike Price)

Suppose Nifty is trading at Rs 9600. A Call option contract with a strike price of 9600 is trading at Rs 110. If you expect that the price of Nifty will fall marginally in the coming weeks, then you can sell 9600 strike and receive upfront premium of Rs 8,250 (110*75). This transaction will result in net credit because you will receive money in your broking account for writing the Call option. This will be the maximum amount that you will gain if the option expires worthless.

So, as per expectation, if Nifty falls or remains at 9600 by expiration, therefore the option will expire worthless. You will not have any further liability and amount of Rs 8,250 (110*75) will be your profit. The probability of making money is 66.67% as you can profit in two scenarios: 1) when price of underlying asset falls. 2) When price stays at same level.

Loss will only occur in one scenario i.e. when the underlying asset moves above the strike price sold.

Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin.

On Expiry Nifty closes at

Net Payoff from Sell Buy (Rs.)

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