Jim

SIE Options Section: The “Help Me Please!?” Topic

By far, the most frequent request that I get for my tutoring services is for the SIE Options section. The reason is quite simple: It’s one of the hardest sections on the SIE exam. What makes this section so difficult?

Quite a few things actually. But first, let’s take a step back and discuss what this section entails.

 

The SIE Options Section

When FINRA changed up the Series 7 Exam last fall, the Securities Industry Essentials (SIE) exam was born. In it, the Options section was actually pared down from the original Series 7 exam. Rather than explore complex option strategies, the SIE exam focuses on higher level concepts. For example, the SIE Options topic introduces call options and put options. Much of the curriculum focuses on the basics around calls and puts – such as what it means to be “long” (or own) a call, or put option. Additionally, what it means to be “short” (or sell – or write) a call, or put option.

When you are new to the finance industry in general, options can be daunting. Not only do you have to understand what a “stock” is, but also the steps in buying (or selling) an option to purchase (sell) a stock.

 

Call Up, Put Down

At this point, you might want to know some tips and tricks. Some of you may have heard this one before, but if not, it’s worth knowing. One of the most common questions that I get around Options is in terms of when an option is “in-the-money” or “out-of-the-money. “

Remember this: Call up, Put down (think of picking up a phone and hanging up a phone – the old landline phones – as you repeat this). The “up” and “down” in this context are meant to tell you what direction the stock must head for your option to be “in the money.”

Call options are “in-the-money” when the stock’s market price is above the strike price (“call up”), while put options are “in-the-money” when the market price is below the strike price (“put down”). Naturally, this implies that the buyer of a call option is “bullish” (hoping the stock’s price goes up). Conversely, the buyer of a put option is “bearish” (hoping the stock’s price goes down).

This little trick alone is one that should get you at least 1-2 points on the exam (which can be the difference between a pass and/or fail).

 

Short Put

I also hear a lot of confusion when it comes to Short Puts. The double negative inherent in this option position is what ends up leaving most people cross-eyed. Unfortunately the sale of a put option comes up time and again in the SIE Options section. So let’s take a quick look at it.

When you short a put option you are the seller of an option which obligates you to buy the stock from the buyer of the put option if they exercise their option. Since the buyer of the put, purchases the right to sell the stock, then whoever sold it them much purchase the stock. That person is the seller of the put. Furthermore, any time you are a “buyer” of the stock, you bet that the stock price will go up. Therefore, you’re bullish.

Still confused?

That’s understandable. As a SIE exam tutor, I’ve taught this subject hundreds of times, and it typically takes at least 2 hours to thoroughly get through the topic.

I have plenty more tips and tricks to help you simplify this concept. If you’d like to book a tutor I’m always happy to help. If you’d rather work this through on your own, that is totally doable too! (That’s what I did when I learned this stuff too). Keep taking practice questions, and eventually you’ll have that “click” moment. Good luck!

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