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Series 7 > Chapter 16 > Flashcards

Chapter 16 Flashcards

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Series 7 Top-off Exam flashcards
1
Q

At what time do equity options stop trading?

A

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

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2
Q

By what time must equity options be exercised?

A

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

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3
Q

What are the specifics regarding equity option expiration?

A

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

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4
Q

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

A

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

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5
Q

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

A

False. All clients receive the document

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6
Q

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

A

15 days

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7
Q

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

A

ROP - Registered Options Principal

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8
Q

When do options trades settle between BD and the OCC?

A

Next business day (T+1)

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9
Q

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

A

T + 3 (3 business days)

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10
Q

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

A

random selection

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11
Q

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

A

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

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12
Q

The ___________________________ issues and guarantees option contracts.

A

Options Clearing Corporation (OCC)

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13
Q

The maximum expiration for standard equity options is ____ months.

A

9 months

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14
Q

The maximum expiration for LEAPS is _____ months.

A

39 months

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15
Q

When may American Style options be exercised?

A

on any business day up to the expiration date

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16
Q

When may European Style options be exercised?

A

only on day before expiration

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17
Q

How can an even split be identified?

A

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

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18
Q

What are some examples of odd splits?

A

3:2, 5:4, 12:5

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19
Q

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

A

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

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20
Q

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?

A

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).

21
Q

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

A

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

22
Q

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

A

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.

23
Q

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

A

True

24
Q

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

A

$.01

25
Q

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

A

ABC long calls and ABC short puts

26
Q

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

A

STC long puts and STC short calls

27
Q

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?

A

$400 Premium

28
Q

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?

A

Emma has a gain of the $500 premium.

29
Q

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?

A

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

30
Q

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

A

cost basis

31
Q

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

A

sales proceeds

32
Q

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

A

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

33
Q

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

A

$5,600

34
Q

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

A

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

35
Q

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

A

$7,300

36
Q

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

A

CALL UP (strike price plus the premium).

37
Q

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

A

PUT DOWN (strike price minus the premium)

38
Q

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

A

married put

39
Q

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?

A

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

40
Q

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

A

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

41
Q

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?

A

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

42
Q

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

A

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

43
Q

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

A

closing transactions

44
Q

What is a LEAP?

A

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

45
Q

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

A

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

46
Q

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

A

4:00 PM

47
Q

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

A

4:15 PM

48
Q

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

A

10

49
Q

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

A

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

Series 7 (25 decks)

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