Analyze Position Strategies - Securities Industry Essentials SIE

Identify the maximum loss potential for a short stock position.

Unlimited (stock price can rise without limit). Short positions carry infinite risk because stock prices can theoretically rise indefinitely, increasing the cost to cover.
What is the breakeven at expiration for a long call?

$\text{breakeven} = \text{strike} + \text{premium}$ . The breakeven for long calls accounts for the premium paid, requiring the stock to exceed the strike by that amount at expiration.
What is the formula for long stock profit or loss per share?

$\text{P/L} = \text{sell price} - \text{buy price}$ . Profit or loss in long positions is calculated by subtracting the purchase price from the sale price per share.
What is a short position in a security?

Sale of borrowed shares with profit if price falls. A short position entails borrowing and selling securities, enabling profit when the market price decreases and shares are repurchased cheaper.
Identify the maximum profit for a short stock position (ignoring commissions).

Limited to proceeds if stock goes to $0$ . In short selling, the maximum gain occurs if the stock becomes worthless, yielding the full short sale proceeds minus costs.
Identify the strategy: writing a covered call to profit if price stays flat or rises slightly.

Neutral to mildly bullish: short covered call. Writing a covered call suits neutral to slightly bullish views, generating income from premiums if the stock remains stable or increases modestly.
Which position is bearish: long put or short put?

Long put is bearish. A long put position anticipates price drops for profit, contrasting with a short put that expects stability or increases.
What is the breakeven at expiration for a short covered call (stock + short call)?

$\text{breakeven} = \text{stock cost} - \text{premium}$ . Covered call breakeven reduces the stock's purchase cost by the received premium, improving the position's effective entry point.
Which position is bullish: long call or short call?

Long call is bullish. Holding a long call position reflects optimism for price appreciation, unlike a short call which bets on stagnation or decline.
Which action closes a short stock position?

Buy to cover (purchase shares to return to lender). Closing a short position involves buying back the borrowed shares to return them, realizing any profit or loss from price changes.
Which market view is associated with a bullish strategy?

Expectation that the security price will rise. Bullish strategies are employed when investors anticipate an upward movement in the security's price, aiming to capitalize on potential gains.
Identify the strategy: buying a call option to benefit from a price increase.

Bullish: long call. Purchasing a call option aligns with a bullish outlook, as it provides the right to buy at a fixed price if the market rises.
Identify the strategy: writing a cash-secured put to profit if price stays above the strike.

Neutral to mildly bullish: short put. Selling a cash-secured put fits neutral to mildly bullish sentiments, earning premiums when the stock price does not drop below the strike.
Identify the strategy: buying a put option to benefit from a price decrease.

Bearish: long put. Acquiring a put option supports a bearish perspective, granting the right to sell at a set price amid expected declines.
Identify the maximum loss for a long stock position (ignoring commissions).

Limited to the amount invested (stock can fall to $0$ ). The downside risk in a long stock position is capped at the initial investment, as the stock's value cannot drop below zero.
What is the breakeven at expiration for a long put?

$\text{breakeven} = \text{strike} - \text{premium}$ . Long put breakeven subtracts the premium from the strike, needing the stock to fall below that level to offset the cost.
What is the formula for short stock profit or loss per share?

$\text{P/L} = \text{sell short price} - \text{buy to cover price}$ . Short position gains or losses are determined by the difference between the initial short sale price and the later cover price.
Which market view is associated with a bearish strategy?

Expectation that the security price will fall. Bearish strategies are used when investors predict a decline in the security's price, positioning to profit from the downward trend.
Identify the maximum profit potential for a long stock position.

Unlimited (price can rise without a fixed cap). Long stock positions offer uncapped upside potential, as there is no theoretical limit to how high the stock price can climb.
What is the basic sequence of steps in a short sale?

Borrow shares, sell them, buy to cover, return shares. Short selling requires borrowing securities first to sell high, then repurchasing at a lower price to return them for profit.
Calculate long call breakeven: strike $50$ , premium $3$ .

$53$ . Adding the premium to the strike price determines the point where the long call position breaks even at expiration.
Calculate short stock P/L: short at $60$ , cover at $52$ (per share).

$+8$ per share profit. The gain results from shorting at a higher price and covering at a lower one, yielding the positive difference per share.
What is a long position in a security?

Ownership of the security with profit if price rises. A long position involves purchasing and holding the security, allowing the investor to benefit from an increase in its market value.
Calculate long stock P/L: buy at $40$ , sell at $47$ (per share).

$+7$ per share profit. The profit equals the difference between the higher selling price and the lower buying price per share in this long position.
Which action closes a long stock position?

Sell the shares owned. To exit a long position, the investor disposes of the held shares, crystallizing gains or losses based on purchase and sale prices.

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