SIE Options Basics, IPOs, Economics & Essential Formulas

Call vs. Put Options

CALL: Gives buyer the RIGHT to BUY 100 shares at the strike price before or at expiration, depending on contract style. | | PUT: Gives buyer the RIGHT to SELL 100 shares at the strike price. | | REMEMBER: Call = Buy. Put = Sell.

Option Buyers vs. Sellers

BUYER (Holder): Has a RIGHT; pays premium. | | SELLER (Writer): Has an OBLIGATION; receives premium. | | Call writer may be obligated to SELL shares. | Put writer may be obligated to BUY shares.

Bullish vs. Bearish Options

BULLISH: Long call or short put. | | BEARISH: Long put or short call. | | Long call: Profits from rising stock price. | Long put: Profits from falling stock price.

Options Maximum Loss

LONG CALL or LONG PUT: | Maximum loss = Premium paid. | | UNCOVERED SHORT CALL: | Potential loss is unlimited. | | SHORT PUT: | Maximum loss = Strike price × 100 − Premium received (assuming standard equity option).

Options Breakeven

LONG CALL: | Strike price + Premium paid. | | LONG PUT: | Strike price − Premium paid. | | For standard equity options, quoted premiums are per share; multiply by 100 for one standard contract.

Initial Public Offering (IPO)

First time a company offers shares to the public. | | • Occurs in primary market | • Issuer generally receives proceeds | • Securities generally require registration unless exempt | | REMEMBER: IPO = First public offering.

Prospectus vs. Red Herring

RED HERRING: Preliminary prospectus used during waiting/cooling-off period. May omit final offering price and other final details. | | FINAL PROSPECTUS: Contains final offering information and required disclosures. | | Red herring = Preliminary. | Prospectus = Final.

Cooling-Off Period

Waiting period after registration statement is filed and before SEC effectiveness. | | • Minimum generally 20 calendar days under standard registration process | • Indications of interest may be solicited | • Sales cannot be completed before effectiveness | • Preliminary prospectus may be distributed.

Monetary vs. Fiscal Policy

MONETARY: Federal Reserve influences money supply and interest rates. | | FISCAL: Congress and President influence economy through government spending and taxation. | | REMEMBER: Monetary = Fed. Fiscal = Government budget.

Leading vs. Lagging Indicators

LEADING: Tend to change BEFORE overall economy; examples include building permits and stock market performance. | | LAGGING: Change AFTER economy; examples include unemployment rate and average duration of unemployment. | | REMEMBER: Leading predicts. Lagging confirms.

Business Cycle

EXPANSION: Economic activity rises. | | PEAK: Highest point before downturn. | | CONTRACTION: Economic activity declines. | | TROUGH: Lowest point before recovery. | | Order: Expansion → Peak → Contraction → Trough.

Current Yield Formula

CURRENT YIELD = Annual bond interest ÷ Current market price. | | Example: | $60 annual interest ÷ $1,200 bond price = 5%. | | REMEMBER: Current yield uses market price, NOT par.

NAV Formula

NET ASSET VALUE = (Total assets − Total liabilities) ÷ Shares outstanding. | | Example: | ($11 million − $1 million) ÷ 1 million shares = $10 NAV.

POP Formula

PUBLIC OFFERING PRICE = NAV ÷ (1 − Sales charge percentage). | | Example: | NAV = $9.50 | Sales charge = 5% | POP = $9.50 ÷ 0.95 = $10.00.

Basis Points

100 basis points = 1 percentage point. | | 1 basis point = 0.01 percentage point. | | 25 bps = 0.25 percentage points. | | Example: Rate rises from 4% to 4.50% = Increase of 50 basis points.