A straddle where the investor buys both options.

An investor buys a straddle anticipating substantial movement in the price of the underlying security but uncertain as to the direction of that movement.

Straddle where the investor WRITES both options.

ex. Write 10 ABC May 40 calls

Write 10 ABC May 40 puts

• investor expects little volatility in underlying stock

Straddle Breakeven Points...how many? How to calculate?

A straddle has 2 breakeven points. The strike price plus (+) and minus (-) the total premium

(breakeven points are the same for long and short straddles)

• The call portion of the straddle will appreciate if the underlying stock increases
• The put portion of the straddle will appreciate if the underlying stock decreases.
• The long straddle will only be profitable if the movement in the underlying stock exceeds the combined premiums paid for both options.

Long Straddle MAXIMUM LOSS

Maximum loss would result if the options expired with the stock price equal to the strike price.

(anticipated volatility never occurred)

Maximum gain is the total $ premium received.  Investor would want both options to expire AT-THE-MONEY

Short Straddle Maximum Loss

A straddle position where the contracts will have different exercise prices and/ or different expiration months. 

A spread offers an investor the opportunity to limit losses on a combined option position in exchange for a limited gain potential.  A basic spread involves the simultaneous purchase and sale of two calls or two puts, on the same underlying security.  The expiration month and/or strike price will be different. 

When the two options of the spread have the same expiration month but different strike prices.

ex.

Buy  1 ABC March 30 call

Write 1 ABC March 40 call

Options have the same strike price but different expiration months.  AKA time, calendar, or horizontal spread.

ex.

buy  1 ABC March 30 Call

Write 1 ABC June 30 call

Options have different strike prices AND different expiration months.

ex.

BUY 1 ABC March 30 call

Write

Options

Result when an investor buys an option with a lower premium and sells an option with a higher premium.

*to be profitable, investors who choose a credit spread expect narrowing

Subtract the difference in premiums from the difference in strike prices

ex.

buy 1 XYZ May 25 Calls @ 1

Write 1 XYZ May 20 Calls @ 4

(25-20)-(4-1)=2

FORMULA

Call Spreads

Breakeven = Lower Strike + Difference in Premiums

Put Spreads

Breakeven = Higher Strike - Difference in Premiums

Net DEBIT Spreads

result when an investor buys an option with a higher premium and sells an option with a lower premium.

Investor is known as a net buyer

Debit spreads WIDEN to become profitable

FORMULA

Net Debit Spread Maximum Gain

=strike difference-premium difference

FORMULA

=lower strike+difference in premiums

Put Spread Breakeven

=higher strike - difference in premiums

Allow investors the opportuniy to speculate on, or hedge the movement of the market rather than the movement of a particular stock. 

2 Types of Index Options

1. Broad Based - composed of a group of stocks that intend to reflect the performance of the entire market.
2. Narrow Based - measures the performance of a particular market segment or industry group.

 Equity Options Expiration Date

Stock Index Options Expiratoin Date

Expire 11:59pm ET on thse Saturday following the third Friday of the month.  (SAME AS EQUITY OPTIONS)

NOTE: Narrow-based index options and broad-based index options both cease trading the day before expiration. 

Growth Funds

Most Suitable For: long-term investment objectives, who can tolerate fluctuations in their principal.

• invest in small companies; often IPOs
• stocks can be very volatile but historically have produced high returns for long-term investors

• invest in companies that pay high dividends in relation to their market price.  Usually mature companies that have less potential for capital appreciation but are less likely to decline in value.

• Have both capital appreciation and current income as investment objectives.
• Invest in companies that are expected to show more growth than a typical equity income stock and higher dividends than most growth stocks. 
• TRADEOFF: usually show less capital appreciation than pure growth funds and lower dividends than income funds.

• invest assets solely in bonds. 
• Main Objective- current income along with preservation of capital. 
• Suceptible to same risks as direct investments in bonds, ie: credit risk, call risk, reinvestment risk and some degree of interest rate risk.

• Increasingly Popular in recent years
• invests its portfolio to mirror the composition of particular benchmark or stock or bond index. ie S&P 500 index
• Attempts to produce same return as index
• historically outperform large percentage of actively managed funds. 

• Maintain proportion of assets in bonds, preferred stock and common stock.
• Show less volatility than common stock funds, declining less in market declines and advancing less in market advances.

• invest in money-market instruments, common stocks and bonds.
• Fund managers determine percentage of fund's assets to invest in each category based on market conditions. Percentage of portfolio may drop to zero in any of the 3 asset classes

• Fund concentrates in specific type of stock.  May focus on particular industry or on a particular geographic location. 
• Special situation funds: invest in companies undergoing change such as bankruptcy.
• Precious metal funds invest in companies whose value is connected to precious metals (may invest in metals themselves)

• Specialize in foreign securities
• may invest in single country or particular geographic region.
• Global Funds invest everywhere in the world including the U.S.
• RISK: more than purely domestic funds, but higher return potential.
• Emerging Market Fund: invests in the stocks and bonds of emerging market countries (countries moving from agriculture to modern industrial, or, from socialist economy to a free market system).

• Invest in short-term debt (money-market instruments) usually with maturities less than 1 year. 
• BENEFITS: liquidity and safety.
• Investors can withdraw funds at any time
• Designed to maintain a constant net asset value of $1 per share
• RETURNS: Vary along with short-term interest rates.
• DIVIDENDS: Declared daily and paid on monthly basis.

*Some invest entirely in U.S. govt securities.  Tax-Exempt money market funds invest in short-term municipal issues, sometimes exclusively in securities of one state.

• Represents a basket of securities which is traded on an exchange.
• Usually represents an index such as Nasdaq 100, S&P 500, Dow Jones Industrial Average, or an index representing securities in a specific industry or country.
• Prices are determined by supply and demand
• investors pay commissions when ETFs are purchased or sold. 
• ADVANTAGES: Low Expenses, Continuous pricing, eligibility to be purchased on margin or sold short, availability of options on these securities.
• Market Timers frequently use ETFs

Mutual Fund Expense Ratio

(Calculation Formula)

Expense Ratio = Total Expenses

                        Average Net Assets

Net Asset Value Per Share

(Calculation Formula)

Net Asset Value Per Share

= Total Net Assets

Number of Shares Outstanding

Mutual Fund Public Offering Price

(formula)

Mutual Fund Sales Load or Sales Charge Percentage

(formula)

Public Offering Price-NAV=Sales Charge

then...

Sales Charge/Public Offering Price

• Ongoing asset based sales charge that is deducted from the customer's account on a quarterly basis.
• used to pay cost of distributing fund's shares to the public (ie: concessions, advertising, prospectus printing)
• Maximum annualized fee 1% of fund's assets, typically ranges from .25%-1%

Mutual Fund Share Classes

CLASS A

• Sales Charges: Front End Load
• 12b-1 Fees:  Low or None
• Other:  Breakpoints available for large purchases

Mutual Fund Share Classes

CLASS C

• Sales Charges: May have a front-end load or a contingent deferred sales charge or both
• 12b-1 Fees:  Higher than Class A shares, generally the same as Class B
• Other: No conversion to Class A shares

definition:  open-end investment companies that are sold to the public at their NAV without any sales charge added.  NAV and ask price are the same. 

Definition:  Dollar levels at which the sales charge is reduced.

Typically the higher dollar amount deposited, the lesser the sales charge.

Letters of Intent

(Mutual Funds)

18-22

Enables an investor to qualify for breakpoint discount without initially depositing entire amount required.  Investor must deposit money over next 13 mos.  May be backdated 90 days. 

Investors failing to make the additional investments are charged the amount that would equal the higher sales charge that applied to the original purcahse. 

Rights of Accumulation

(Mutual Funds 18-23)

Give investors the right to receive cumulative quantity discounts when purchasing mutual fund shares. 

example:  $20k new money pushes investor through next breakthrough point (50k breakpoint perhaps), will pay lesser breakpoint sales charge on the 20k investment.

Fund Families

(mutual funds 18-24)

• aka fund complexes
• used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase.  ie (American Funds, Fidelity, etc)

Withdrawl Plans

(Mutual Funds 18-28)

• An option provided to investors by the fund to systematically withdraw on a monthly or quarterly basis. 
• Usually require minimum investment
• Dividends and capital gains distributions are normally reinvested with withdrawl plans. 
• When liquidating shares, shares purchased with reinvested dividends and capital gains are liquidated first.   

Dollar Cost Averaging

(Mutual Funds 18-28)

• A person invests a fixed-dollar amount at regular intervals regardless of the market price of the security
• Most appropriate for long-term investors
• Results in average cost per share being lower than the average of the prices at which the investor purchased shares.

Reinvestment of Dividends

(Mutual Funds 18-28)

• Investors may elect to reinvest distributions from mutual funds in additional shares rather than take them in cash. 
• BENEFITS: compounding (earn interest on interest), typically additional shares are purchased without sales charge.
• All funds do this automatically unless otherwise requested by the investor.

Real Estate Investment Trusts (REITs)

(18-30)

• A REIT company manages a portfolio of realestate oriented investments in order to earn profits for investors. 
• 2 types of REITs.
• Equity REIT invests its portfolio in real estate assets  nd investors receive income from rents and capital gains from the sale of appreciated property.
• Mortgage REIT: Borrows money from a commerical bankand then lends the borrowed funds at a higher rate to building developers.  Passes income through to investors.  At least 75% gross income must be from real property.

Total Net Assets of a Fund

(Calculation)

Total Net Assets=

Cash and Equivelants

Total Net Assets

NAV % of Appreciation from Yearly Low

(Calculation)

Recovery from Low =

NAV-Low

Low

• Payments: Provides fixed payments of a specified amt for the contract term
• Rate of Return: Guarantees a specific minimum rate of return
• Risk: Insurance company assumes the investment risk
• Inflation: Inflation will erode the value of payments over the years
• Security?:  No.  There is no prospectus and no securities registration

Revisionary Working Interest

(Direct Participation Programs)

20-17

Overriding Royalty Interest

Sharing Arrangements

20-17

Functional Allocation Agreement

Sharing Arrangements

20-17

Disproportionate Sharing Agreement

DPP Sharing Arrangements 

20-17

GNMA: Government National Mortgage Association

(GINNIE MAE)

Securities that pool debt obligations and pass through the principal and interest payments made by debtors to the security holders.

Writes rules and regulations for firms that transact business in municipal securities.

The price at which a convertible security's value would be equal to that of the underlying stock if converted.

NYSE minimum maintenance requirement

1. The customer's name and residence
2. Whether the customer is of legal age (but the customer's birth date is not required)
3. The signature of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account
4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity