Series 7 Exam Question 273: Answer and Explanation

Question: 273

John believes that the market is about to become bearish and would like to be able to profit in the event that he is correct. Which of the following investments would meet John's needs?

I. Inverse ETFs

II. Selling SPX calls

III. High-yield bond funds

IV. Selling OEX puts

• A. I and II
• B. II and IV
• C. I, II, and III
• D. I, II, and IV

Correct Answer: A

Explanation:

A. If John wants to profit from a possible decline in the market, he has to employ bearish strategies. Inverse ETFs (exchange-traded funds) are funds that trade on an exchange and use derivative products, such as options, to attempt to profit from a decline in the underlying securities, such as the S&P 500. Selling SPX (S&P 500) calls is a bearish strategy in which the seller profits if the underlying securities stay the same or decline in value. High-yielding bond funds (junk bond funds) are more likely to be damaged if the market declines in value, and selling OEX (S&P 100) puts is a bullish, not bearish, strategy.