Series 7 Exam Prep 92, Options Breakeven and Strategy Math Review

0:00Today, we are tackling options math for the Series 7 exam, focusing on break-evins, maximum gains and losses, and key strategies. For any single call option, long or short, the break-even is always the strike price plus the premium. For any single put option, long or short, the break-even is the strike price minus the premium. Let's move to covered calls and income-generating strategy. If you buy 100 shares of XYZ at 55 and sell one XYZ 60 call for a 3-point premium, your break-even is the stock cost minus the premium received. In this case, 55 minus 3 equals a break-even of 52. A common exam trap is to add the premium like a standard call. Remember, with covered calls, you subtract. The maximum gain on a covered call is the premium received plus the appreciation of the stock up to the strike price. From our break-even of 52, up to the strike price of 60

1:00is an 8-point gain or $800. Your maximum loss is the break-even price down to zero, so a $5,200 loss. For a protective put, which is a hedging strategy, if you buy 100 shares of ABC at 28 and buy one ABC 25-put for a 2-point premium, your break-even is the stock cost plus the premium paid. Here, 28 plus 2 equals a break-even of 30. The maximum loss is the difference between the break-even and the strike price, so 30 minus 25 gives you a maximum loss of 5 points or $500. The maximum gain is unlimited because you still own the stock. Now for straddles, which involve buying or selling both a call and a put with the same strike price and expiration. A long straddle is profitable if the stock is volatile. There are two break-even points. The strike price plus and minus the combined premiums. For example, if you buy an XYZ 50 call for four

2:00and an XYZ 50 put for three, the total premium is seven. Your upside break-even is 57, and your downside break-even is 43. Your maximum loss is the total premium paid, which is $700, and this occurs if the stock price is exactly at the strike price at expiration. Your maximum gain is unlimited on the upside and substantial on the downside. A short straddle is the opposite. You want the stock to remain stable. Your maximum gain is the total premium received. The maximum loss is unlimited due to the short call position. Spreads involve being long and short the same type of option. For call spreads, the break-even is found by adding the net premium to the lower strike price. For put spreads, you subtract the net premium from the higher strike price. For a debit spread, the maximum loss is the net debit paid. For a credit spread, the maximum gain is the net credit received. The maximum gain and loss for a spread are always equal to the difference in the strike prices.

3:03A simple mnemonic for spreads is push and cow. For put spreads, subtract from the higher strike to find the break-even. For call spreads, add to the lower strike. For free practice questions, AI-powered explanations, and more exam prep tools, visit OpenExamprep.com. That's OpenExamprepall1word.com.