Chapter 16 Flashcards
At what time do equity options stop trading?
4:00 p.m. ET on the third Friday of the expiration month
By what time must equity options be exercised?
5:30 p.m. ET on the third Friday of the expiration month
What are the specifics regarding equity option expiration?
They expire at 11:59 p.m. ET on the Saturday following the third Friday of the expiration month.
What is the correct order of the four steps to opening an options account?
1) Complete Options Account Agreement 2) ROP Approval 3) Trading 4) Customer signature within 15 days
True or False: Sophisticated clients with extensive experience need not be provided with an Option Disclosure Document.
False. All clients receive the document
Clients must sign and return the options account agreement within _____ days.
15 days
Within a firm, who performs the supervisory functions as they pertain to options?
ROP - Registered Options Principal
When do options trades settle between BD and the OCC?
Next business day (T+1)
Upon the exercise of an equity option, when does the transaction in the underlying security settle?
T + 3 (3 business days)
What method does the OCC use when issuing an exercise notice to a BD?
random selection
Once a firm is randomly selected by the OCC to receive the exercise notice, how will it in turn assign the notice?
Random selection, first-in / first-out (FIFO), or any other fair and equitable method.
The ___________________________ issues and guarantees option contracts.
Options Clearing Corporation (OCC)
The maximum expiration for standard equity options is ____ months.
9 months
The maximum expiration for LEAPS is _____ months.
39 months
When may American Style options be exercised?
on any business day up to the expiration date
When may European Style options be exercised?
only on day before expiration
How can an even split be identified?
Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)
What are some examples of odd splits?
3:2, 5:4, 12:5
Glenn owns 1 ABC May 60 Call. If ABC announces a 2:1 split, how would Glenn’s position change?
Glenn now has 2 ABC May 30 Calls (100 shares each). The overall contract value must remain $6,000.
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?
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).
Will the number of option contracts held be adjusted for odd splits or stock dividends?
No. Odd splits and stock dividends increase the shares per contract and decrease the strike price.
An investor owns 1 ABC May 60 Call. If ABC declares a 25% stock dividend, what is the investor’s new position?
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.
True or False: When adjusted for stock splits or stock dividends, an option’s overall contract value remains constant.
True
The OCC will automatically exercise any option that is in-the-money by $____.
$.01
If the OCC examines position limits on ABC, what contracts are added on the bullish side of the market?
ABC long calls and ABC short puts
If the OCC examines position limits on STC, what contracts are added on the bearish side of the market?
STC long puts and STC short calls
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?
$400 Premium
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?
Emma has a gain of the $500 premium.
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?
gain of $550. Since he liquidated (sold), just gets the gain premium
For tax purposes, what is determined when a long call or short put is exercised and the investor acquires stock?
cost basis
If a long put or short call is exercised and the investor delivers stock, he must determine his _________________.
sales proceeds
Julio bought a 75 call at 5 and later exercised the option. What is Julio’s cost basis?
$8,000 (7,500 stock price + 500 premium)
Eric sold a 50 call at 6 and was later exercised against. Eric would have sales proceeds of how much?
$5,600
Jean bought an 80 put at 7 and later exercised the contract. Jean would have sales proceeds of how much?
$8,000 - $700 = $7,300 or 73 (strike price minus the premium)
Mark sold an 80 put at 7 and was later exercised against. What is Mark’s cost basis?
$7,300
If asked to determine basis or sales proceeds on an exercised call, remember to ____________.
CALL UP (strike price plus the premium).
If asked to determine basis or sales proceeds on an exercised put, remember to ____________.
PUT DOWN (strike price minus the premium)
An investor who buys stock and on the same day buys a put (creating a hedge) has established a ________________.
married put
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?
40 + 3 = 43 (The cost of the stock plus the cost of the option)
If a married put is established and the option expires, what happens to the investor’s basis?
The basis (cost of the stock plus the cost of the option) will stay the same even after expiration.
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?
Yes, the put purchase terminates the stock’s holding period.
If Will has held ABC stock for 3 years and then buys a put on ABC stock, is the holding period affected?
No, once a long-term holding period is established, it is not destroyed by a put purchase.
Only __________ transactions can be effected if a client does not sign and return the options account agreement.
closing transactions
What is a LEAP?
A long-term equity option (maturity of up to 39 months)
What is the tax result for a LEAP that was purchased at 6 and two years later sold at 12?
A long-term capital gain of $600. Remember, a gain on an asset held greater than one year is long-term
Narrow-based index options trade until _______ p.m. ET.
4:00 PM
Broad-based index options trade until _______ p.m. ET.
4:15 PM
Options-related retail communication must be filed with a regulator at least _____ calendar days prior to use.
10
True or False: Options-related retail communication that is sent to existing clients must be filed with a regulator.
False. Retail communication sent to a person who has received the ODD (e.g. existing customers) need not be filed.
