Chapter 16

Question 1

At what time do equity options stop trading?

Answer 1

4:00 p.m. ET on the third Friday of the expiration month

Question 2

By what time must equity options be exercised?

Answer 2

5:30 p.m. ET on the third Friday of the expiration month

Question 3

What are the specifics regarding equity option expiration?

Answer 3

They expire at 11:59 p.m. ET on the Saturday following the third Friday of the expiration month.

Question 4

What is the correct order of the four steps to opening an options account?

Answer 4

1) Complete Options Account Agreement 2) ROP Approval 3) Trading 4) Customer signature within 15 days

Question 5

True or False: Sophisticated clients with extensive experience need not be provided with an Option Disclosure Document.

Answer 5

False. All clients receive the document

Question 6

Clients must sign and return the options account agreement within _____ days.

Answer 6

15 days

Question 7

Within a firm, who performs the supervisory functions as they pertain to options?

Answer 7

ROP - Registered Options Principal

Question 8

When do options trades settle between BD and the OCC?

Answer 8

Next business day (T+1)

Question 9

Upon the exercise of an equity option, when does the transaction in the underlying security settle?

Answer 9

T + 3 (3 business days)

Question 10

What method does the OCC use when issuing an exercise notice to a BD?

Answer 10

random selection

Question 11

Once a firm is randomly selected by the OCC to receive the exercise notice, how will it in turn assign the notice?

Answer 11

Random selection, first-in / first-out (FIFO), or any other fair and equitable method.

Question 12

The ___________________________ issues and guarantees option contracts.

Answer 12

Options Clearing Corporation (OCC)

Question 13

The maximum expiration for standard equity options is ____ months.

Answer 13

9 months

Question 14

The maximum expiration for LEAPS is _____ months.

Answer 14

39 months

Question 15

When may American Style options be exercised?

Answer 15

on any business day up to the expiration date

Question 16

When may European Style options be exercised?

Answer 16

only on day before expiration

Question 17

How can an even split be identified?

Answer 17

Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)

Question 18

What are some examples of odd splits?

Answer 18

3:2, 5:4, 12:5

Question 19

Glenn owns 1 ABC May 60 Call. If ABC announces a 2:1 split, how would Glenn’s position change?

Answer 19

Glenn now has 2 ABC May 30 Calls (100 shares each). The overall contract value must remain $6,000.

Question 20

An investor owns 1 ABC May 60 Call. If ABC announces a 3:2 split, what are the terms of the investor’s contract now?

Answer 20

1 ABC May 40 call, 150 shares.

Shares increase to 150 (100 x 3/2) and strike price decreases to $40 ($60 x 2/3).

Question 21

Will the number of option contracts held be adjusted for odd splits or stock dividends?

Answer 21

No. Odd splits and stock dividends increase the shares per contract and decrease the strike price.

Question 22

An investor owns 1 ABC May 60 Call. If ABC declares a 25% stock dividend, what is the investor’s new position?

Answer 22

1 ABC May 48, 125 shares.

The call is for 125 shares (100 x 25% = extra 25). Then, $6,000 (total value) ÷ 125 sh. = $48.

Question 23

True or False: When adjusted for stock splits or stock dividends, an option’s overall contract value remains constant.

Answer 23

True

Question 24

The OCC will automatically exercise any option that is in-the-money by $____.

Answer 24

$.01

Question 25

If the OCC examines position limits on ABC, what contracts are added on the bullish side of the market?

Answer 25

ABC long calls and ABC short puts

Question 26

If the OCC examines position limits on STC, what contracts are added on the bearish side of the market?

Answer 26

STC long puts and STC short calls

Question 27

Marty buys 1 ABC May 55 Call at 4. Later, if ABC is at 51 and the option expires, what is Marty's gain or loss?

Answer 27

$400 Premium

Question 28

Emma sells 1 RST Oct 40 Put at 5. Later, if RST is at 43 and the option expires, what is Emma's gain or loss?

Answer 28

Emma has a gain of the $500 premium.

Question 29

Holden buys 1 STC 65 Call at 3. Later STC rises to 72 and the call is liquidated at 8.50. Is there a gain or loss?

Answer 29

gain of $550. Since he liquidated (sold), just gets the gain premium

Question 30

For tax purposes, what is determined when a long call or short put is exercised and the investor acquires stock?

Answer 30

cost basis

Question 31

If a long put or short call is exercised and the investor delivers stock, he must determine his _________________.

Answer 31

sales proceeds

Question 32

Julio bought a 75 call at 5 and later exercised the option. What is Julio's cost basis?

Answer 32

$8,000 (7,500 stock price + 500 premium)

Question 33

Eric sold a 50 call at 6 and was later exercised against. Eric would have sales proceeds of how much?

Answer 33

$5,600

Question 34

Jean bought an 80 put at 7 and later exercised the contract. Jean would have sales proceeds of how much?

Answer 34

$8,000 - $700 = $7,300 or 73 (strike price minus the premium)

Question 35

Mark sold an 80 put at 7 and was later exercised against. What is Mark's cost basis?

Answer 35

$7,300

Question 36

If asked to determine basis or sales proceeds on an exercised call, remember to ____________.

Answer 36

CALL UP (strike price plus the premium).

Question 37

If asked to determine basis or sales proceeds on an exercised put, remember to ____________.

Answer 37

PUT DOWN (strike price minus the premium)

Question 38

An investor who buys stock and on the same day buys a put (creating a hedge) has established a ________________.

Answer 38

married put

Question 39

Mary bought 100 shares of GMG at 40 and on the same day buys 1 GMG Apr 40 put at 3. What is Mary's basis in the stock?

Answer 39

40 + 3 = 43 (The cost of the stock plus the cost of the option)

Question 40

If a married put is established and the option expires, what happens to the investor's basis?

Answer 40

The basis (cost of the stock plus the cost of the option) will stay the same even after expiration.

Question 41

Jim has owned BNB stock for 9 months and now buys a BNB put to hedge. Does the put purchase affect Jim's holding period?

Answer 41

Yes, the put purchase terminates the stock's holding period.

Question 42

If Will has held ABC stock for 3 years and then buys a put on ABC stock, is the holding period affected?

Answer 42

No, once a long-term holding period is established, it is not destroyed by a put purchase.

Question 43

Only __________ transactions can be effected if a client does not sign and return the options account agreement.

Answer 43

closing transactions

Question 44

What is a LEAP?

Answer 44

A long-term equity option (maturity of up to 39 months)

Question 45

What is the tax result for a LEAP that was purchased at 6 and two years later sold at 12?

Answer 45

A long-term capital gain of $600. Remember, a gain on an asset held greater than one year is long-term

Question 46

Narrow-based index options trade until _______ p.m. ET.

Answer 46

4:00 PM

Question 47

Broad-based index options trade until _______ p.m. ET.

Answer 47

4:15 PM

Question 48

Options-related retail communication must be filed with a regulator at least _____ calendar days prior to use.

Answer 48

10

Question 49

True or False: Options-related retail communication that is sent to existing clients must be filed with a regulator.

Answer 49

False. Retail communication sent to a person who has received the ODD (e.g. existing customers) need not be filed.