Series 7 Exam - Options Strategies & Municipal Securities Flashcards

Question 1

Long Straddle Breakeven Points

Accepted Answer

A long straddle consists of buying a call and a put with the same strike and expiration. It has two breakeven points:
- $	ext{Upper Breakeven} = 	ext{Strike Price} + 	ext{Total Premiums Paid}$
- $	ext{Lower Breakeven} = 	ext{Strike Price} - 	ext{Total Premiums Paid}$

Question 2

Long Straddle Max Profit & Max Loss

Accepted Answer

- $	ext{Max Profit} = 	ext{Unlimited}$ (to the upside as stock price rises).
- $	ext{Max Loss} = 	ext{Total Premiums Paid}$ (occurs if the underlying stock price equals the strike price at expiration).

Question 3

Short Straddle Max Profit & Max Loss

Accepted Answer

- $	ext{Max Profit} = 	ext{Total Premiums Received}$ (occurs if stock closes exactly at the strike price at expiration).
- $	ext{Max Loss} = 	ext{Unlimited}$ (due to the short uncovered call position).

Question 4

Bull Call Spread (Debit Spread) Formulas

Accepted Answer

Buy call with lower strike, sell call with higher strike:
- $	ext{Net Debit} = 	ext{Premium Paid} - 	ext{Premium Received}$
- $	ext{Breakeven} = 	ext{Lower Strike} + 	ext{Net Debit}$
- $	ext{Max Profit} = (	ext{Strike Difference}) - 	ext{Net Debit}$
- $	ext{Max Loss} = 	ext{Net Debit Paid}$

Question 5

Bear Put Spread (Debit Spread) Formulas

Accepted Answer

Buy put with higher strike, sell put with lower strike:
- $	ext{Net Debit} = 	ext{Premium Paid} - 	ext{Premium Received}$
- $	ext{Breakeven} = 	ext{Higher Strike} - 	ext{Net Debit}$
- $	ext{Max Profit} = (	ext{Strike Difference}) - 	ext{Net Debit}$
- $	ext{Max Loss} = 	ext{Net Debit Paid}$

Question 6

Bear Call Spread (Credit Spread) Formulas

Accepted Answer

Sell call with lower strike, buy call with higher strike:
- $	ext{Net Credit} = 	ext{Premium Received} - 	ext{Premium Paid}$
- $	ext{Breakeven} = 	ext{Lower Strike} + 	ext{Net Credit}$
- $	ext{Max Profit} = 	ext{Net Credit Received}$
- $	ext{Max Loss} = (	ext{Strike Difference}) - 	ext{Net Credit}$

Question 7

Tax-Equivalent Yield (TEY) Formula

Accepted Answer

Calculates the taxable yield required to equal a tax-free municipal yield:
$$	ext{TEY} = \frac{	ext{Municipal Yield}}{1 - 	ext{Investor's Marginal Tax Rate}}$$

Question 8

Tax-Free Equivalent Yield Formula

Accepted Answer

Calculates the yield a municipal bond must offer to match a corporate taxable yield:
$$	ext{Tax-Free Equivalent Yield} = 	ext{Taxable Yield} 	imes (1 - 	ext{Marginal Tax Rate})$$

Question 9

Municipal Bond Federal Taxability

Accepted Answer

Interest income from municipal bonds is **exempt from federal income tax**. However, any capital gains realized from trading or selling municipal bonds are **fully taxable**.

Question 10

In-State vs. Out-of-State Municipal Bond Taxation

Accepted Answer

- **In-State Purchase**: Generally exempt from federal, state, and local taxes (triple tax-free).
- **Out-of-State Purchase**: Exempt from federal taxes, but **subject to state and local taxes** in the investor's home state.

Question 11

Options Disclosure Document (ODD) Delivery Requirement

Accepted Answer

According to FINRA rules, the Options Disclosure Document (ODD) must be delivered to a customer **at or prior to the time** the account is approved for options trading.

Question 12

Options Agreement Return Timeline

Accepted Answer

The customer must sign and return the written Options Agreement within **15 calendar days** after account approval. If not returned in time, the customer is restricted to **closing transactions only**.

Question 13

MSRB Rule G-37 (Political Contributions)

Accepted Answer

Prohibits a municipal firm from engaging in municipal securities business with an issuer for **2 years** if a political contribution is made to an official of that issuer by the firm or a Municipal Finance Professional (MFP). 
*Exception*: Contributions up to **$250 per election** by an MFP eligible to vote for that official.

Question 14

Vertical Spread Definition

Accepted Answer

An options strategy involving the simultaneous purchase and sale of options of the same class (both calls or both puts) with the **same expiration date** but **different strike prices**.

Question 15

Horizontal (Calendar/Time) Spread Definition

Accepted Answer

An options strategy involving options of the same class with the **same strike price** but **different expiration months**.

Question 16

Option Combination vs. Straddle

Accepted Answer

Both involve buying or selling a call and a put on the same underlying security. In a **Straddle**, the strikes and expirations are identical. In a **Combination**, the strike prices, expiration dates, or both are **different**.

Question 17

FINRA Option Position Limits

Accepted Answer

Limits the maximum number of option contracts an investor (or group acting in concert) can hold on the **same side of the market**:
- **Bullish Side**: Long Calls + Short Puts
- **Bearish Side**: Long Puts + Short Calls

Question 18

General Obligation (GO) vs. Revenue Bonds

Accepted Answer

- **GO Bonds**: Backed by the full faith, credit, and **taxing power** of the issuing municipality (requires voter approval).
- **Revenue Bonds**: Backed solely by revenues generated from a **specific project/facility** (e.g., toll roads, airports; subject to feasibility studies).

Question 19

Industrial Development Revenue (IDR) Bonds Tax Exception

Accepted Answer

IDRs are issued to construct facilities for private corporations. Because they benefit private entities, interest income may be subject to the **Alternative Minimum Tax (AMT)** for high-income investors.

Question 20

Discretionary Accounts Options Approval Rules

Accepted Answer

Prior to executing discretionary options trades, the firm must obtain:
1. Written authorization from the client.
2. Written approval of the account by a **Registered Options Principal (ROP)**.

Series 7 Exam - Options Strategies & Municipal Securities

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