Have you ever seen a college basketball game in which the opposing fans try to haze the free-throw shooter by waving colorful distractions and shouting at him?
Ever noticed how it has zero effect on a good free-throw shooter?
The Series 65 and 66 exam also like to haze the people shooting free-throws at the testing center. They know that the answer is sitting right there in front of you like an open hoop, so they have to distract you from choosing it. One trick is to overwhelm you with verbiage. Another is to present common formulae backwards. Still another is to use weird jargon that you weren’t expecting. Like this possible exam question:Joey Investor is long 1,000 shares of ORCL common stock. It is now June, and Joey feels that the market for ORCL is headed sideways over the next several weeks. Therefore, he should
A. sell 10 ORCL Jul calls
B. buy 10 ORCL Jul puts
C. sell 10 ORCL Jul puts
D. buy 10 ORCL Jul calls
EXPLANATION: Always sell options if the market is supposed to go “sideways” or “remain unchanged.” That way, you get the premium now, and then the option expires. Don’t sell puts if you own stock–if the stock goes to zero, you lose 100% on the stock, then you have the OBLIGATION TO BUY the stock for the strike price . . . even though it’s worthless. Sell covered calls in this situation. Joey owns 1,000 shares, so he can cover 10 call options.
What if you don’t know what “sideways” and/or “long” mean?
You could be in trouble. That’s why I just posted this question.