CBOE Rules Flashcards
Which of the following is defined as options “advertising”?
A. Options disclosure document
B. Standard option worksheet
C. Options website
D. Letters of an “individual” nature sent to customers
The best answer is C.
Options advertising is defined as any sales material that reaches a public audience through a mass medium, including: websites, newspapers, periodicals, magazines, radio, television, telephone recordings, motion pictures, billboards, signs, or through sales communications to the public.
A letter sent to a customer is defined as correspondence; an options worksheet is defined as sales literature. The Options Disclosure Document (ODD) is the required offering information that must be given to customers when they open an options account; and that must accompany or precede any options communication that makes a recommendation; that shows past performance; or that makes a projection.
Which of the following is defined as options “sales literature”?
A. Options movie
B. Options prospecting letter sent to 10 clients
C. Letters of an “individual” nature sent to customers
D. Options research report
The best answer is D.
Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document.
Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not “promotional” and they must state where an Options Disclosure Document can be obtained.
A letter of an individual nature to a customer is defined as correspondence, as is an options prospecting letter sent to fewer than 25 existing or potential clients (note that if the letter is sent to 25 or more existing or potential clients, it becomes sales literature).
Which of the following options communications must be approved by the designated Registered Options Principal prior to use?
I Advertising
II Sales literature
III Independently prepared reprints
A. I only
B. I and II
C. II and III
D. I, II, III
The best answer is D.
Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients.
Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm’s policies and procedures.
Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to “post use review and approval” by a branch manager or ROP.
Which of the following options communications sent to more than 25 prospective customers must be approved by the designated Registered Options Principal prior to use?
A. Advertising
B. Sales literature
C. Independently prepared reprints
D. All of the above
The best answer is D.
Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients.
Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm’s policies and procedures.
Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to “post use review and approval” by a branch manager or ROP.
Regarding options sales literature, which statement is TRUE?
A. Options sales literature is prohibited from containing specific recommendations
B. Options sales literature must be accompanied by complete documentation that supports any claims
C. Options sales literature that shows performance must be accompanied or preceded by the latest Options Disclosure Document
D. Options sales literature is prohibited from containing annualized yield calculations
The best answer is C.
A customer who receives any options communication that makes a recommendation; shows past performance; or includes a performance projection; must get the latest Options Disclosure Document (ODD) at or prior to the receipt of the material.
Which of the following statements are TRUE regarding options sales literature that includes a recommendation?
I It must be approved prior to use by the designated Registered Options Principal
II It must be accompanied or preceded by a copy of the latest Options Disclosure Document
III Showing past or projected performance is permitted
IV It must be pre-filed with the exchange
A. I and II only
B. III and IV only
C. I, II, III
D. I, II, III, IV
The best answer is C.
All options communications with the public must be approved by the designated ROP (main office compliance ROP) - not the Branch Manager. Any communication that shows past performance; makes a performance projection; or that makes a recommendation; must be accompanied or preceded by the ODD (Options Disclosure Document). Options sales literature usually falls under these rules.
Only options communications that are NOT accompanied by the ODD must be filed with the Exchange 10 days in advance of use. These are basically advertisements seen by the general public.
Standards for options advertising that is not preceded by delivery of the ODD (Options Disclosure Document) allow all of the following EXCEPT:
A. making reference to the Options Clearing Corporation
B. using a corporate logo
C. referring to a specific options exchange
D. referring to a specific option contract
The best answer is D.
The recommendation or reference to specific options contracts is prohibited in options any options communication that is not accompanied or preceded by delivery of the ODD. However, advertising can mention the functions of the Options Clearing Corporation, can include the broker-dealer’s name and logo; and can explain the functions of the options exchanges.
A registered representative sends a prospecting letter to customers stating that significant profits can be achieved by purchasing call options in a rising market. This claim:
A. is prohibited under the rules of the options exchanges
B. must be balanced by a statement that trading options can also result in significant losses
C. can only be made if it is documented by actual customer examples which occurred within the past year
D. is permitted and does not require any prior approval
The best answer is B.
Under the communications rules of the exchanges, any claims that profits can be generated from an investment strategy must be balanced by a statement that losses can also occur.
A registered representative completes the firm’s standard options worksheet for a customer to illustrate the potential profits and risks of a covered call writing strategy. At or prior to sending the worksheet to the customer, which statement is TRUE?
A. The completed worksheet must be approved by the firm’s compliance department
B. The customer must receive the latest Options Disclosure Document
C. The completed worksheet must be approved by Exchange
D. No further steps are required to send the standard worksheet
The best answer is B.
The firm’s “standard options worksheet” is a pre-printed form for a specific options strategy, that is “filled in” by the registered representative to show a customer maximum gain, loss, and breakeven for a particular options strategy recommended to that customer. Before standard forms can be used, they must be approved by the firm’s designated Registered Options Principal.
However, this is not what the question is asking. Once these standard forms have been approved by the designated ROP, they can be completed and used by any registered representative with Branch Manager approval. However, the customer must receive the latest Options Disclosure Document at or prior to receipt of the completed standard options worksheet, since these include a performance projection.
There is no filing with, or approval by, the CBOE, since options sales literature is accompanied or preceded by the ODD. Only communications that are not accompanied or preceded by the ODD (basically options advertising) must be pre-filed with the CBOE.
A registered representative completes a standard options worksheet for a customer. Which of the following statements are TRUE?
I The customer must have received an Options Disclosure Document at or prior to receiving the options worksheet
II The customer must have received an Options Agreement at or prior to receiving the options worksheet
III Prior to its first use, the options worksheet must have been approved by the firm’s designated Registered Options Principal
IV Prior to its first use, the options worksheet must have been approved by the CBOE
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
The firm’s “standard options worksheet” is a pre-printed form for a specific options strategy, that is “filled in” by the registered representative to show a customer maximum gain, loss, and breakeven for a particular options strategy recommended to that customer. Before standard forms can be used, they must be approved by the firm’s designated Registered Options Principal.
Once these standard forms have been approved by the designated ROP, they can be completed and used with Branch Manager approval. However, the customer must receive the latest Options Disclosure Document at or prior to receipt of the completed standard options worksheet, since these include a performance projection.
There is no filing with, or approval by, the CBOE, since options sales literature is accompanied or preceded by the ODD. Only communications that are not accompanied or preceded by the ODD (basically options advertising) must be pre-filed with the CBOE.
The designated Registered Options Principal is responsible for all of the following functions EXCEPT:
A. approval of options advertising
B. approval of options accounts
C. writing of procedures for supervision of options accounts
D. review of procedures for supervision of options accounts
The best answer is B.
The designated Registered Options Principal resides in the main office of the firm and is responsible for creating and enforcing procedures for compliance with the rules of the O.C.C. and options exchanges. This person is also responsible for approving all options advertising and sales literature.
Each branch must have a BOM - Branch Office Manager. This person is responsible for approving options accounts, options orders, options correspondence sent to 25 or fewer existing or prospective clients and for resolving options complaints.
All of the following options orders to sell calls are permitted EXCEPT a(n):
A. individual selling naked calls in a discretionary account
B. investment company selling calls against securities in its portfolio
C. corporation selling calls against its underlying stock
D. custodian selling calls against securities in a custodian account
The best answer is C.
Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting existing stockholders’ equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock.
There is no prohibition on investment companies selling calls against stocks held in their portfolios - this is a very popular strategy for enhancing income. Custodians can also sell covered calls against securities held in the custodian account to increase income. In a discretionary account, all orders are permitted as long as a written power of attorney is received from the customer and the trades are suitable for the account.
Issuers of securities are prohibited from:
A. buying calls on their own stock
B. selling calls on their own stock
C. buying puts on their own stock
D. selling puts on their own stock
The best answer is B.
Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting each existing stockholder’s equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock.
