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Series 7 > Chapter 16 > Flashcards

Chapter 16 Flashcards

Options Account Opening Procedures, Taxation, and Trading Markets

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Series 7 Top-off Exam flashcards
1
Q

Designated Primary Market Makers (DPM’s)

A
  • act as principals

- Purchasing and selling option contracts for their own personal account

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2
Q

Floor Brokers

A
  • act as agents

- executing orders for both the public and other members

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3
Q

Order Book Official (OBO)

A
  • maintain the public customer limit order book
  • acts as as broker’s broker
  • responsible for recording and executing these orders
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4
Q

Legging in/out

A

The process of buying or selling each option separately (with spreads, straddles, combinations, etc.)

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5
Q

Exercise Limit

A

Maximum number of contracts that an investor may exercise withing five consecutive business days

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6
Q

Deadlines for standardized option contracts

A
  • issued with expiration of nine months
  • expires 11:59 ET on the third Friday of expiration month
  • cease trading at 4:00 ET
  • Buyer must express intent to exercise option by 5:30 ET
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7
Q

When do standard equity option trades settle?

A

Next business day

T+1

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8
Q

When do settlements of an standard exercised option occur?

A

Two business days

T+2

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9
Q

Non-Equity Option Expiration

A
  • 11:59 pm ET, third Friday of the expiration month
  • Narrow based cease trading end at 4
  • broad based cease trading end at 4:15
  • next business day
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10
Q

LEAPS Expiration

A

-39 months

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11
Q

Advantages of LEAPS

A
  • lose their time value much slower than standard options
  • Offer LT protection against unfavorable movement in the market value of an underlying stock postition
  • Provides a LT opportunity to participate in the price movement of a security
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12
Q

Even Stock Splits adjustments

A
  • Increase in the number of option contracts

- Decrease in exercise price

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13
Q

Odd Stock Splits adjustments

A
  • Increase in the number of shares underlying the contract (no longer 100)
  • decrease in the exercise price
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14
Q

Reverse Stock Split adjustments

A
  • Reduction in the number of shares (no longer 100)

- Increase in the exercise price

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15
Q

Stock Dividend adjustment

A

SAME AS ODD STOCK SPLIT

  • Increase in the number of shares underlying the contract (no longer 100)
  • decrease in the exercise price
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16
Q

Gather customer information through Options Account Agreement

A
  • financial status, objectives, experience
  • date need NOT be verified, but copy sent for customer signature
  • Send OCC Risk Disclosure Document AT OR PRIOR
17
Q

Registered Options Principal Approval (ROP)

A
  • must determine account is suitable

- Not officially open until this step

18
Q

Allow opening Transactions

A

-ONLY AFTER approval by ROP

19
Q

Signature of the Options Account Agreement

A
  • Within 15 days of the ROP’s approval

- if not received, only closing transactions would be permitted

20
Q

What would happen if an account is exercised?

A
  • American Style
    1. Client notifies BD
    2. BD notifies OCC
    3. OCC RANDOMLY selects one BD
    4. BD assigns a notice to a specific customer by using either random method, FIFO, or any other fair method (must disclose method to clients)
    5. Settles in TWO business days from exercise date
21
Q

Married Put

A
  • Put purchased on the same day that the stock is purchased
  • The holding period for the stock starts
  • The premium paid becomes part of the stock’s basis, even after expiration
22
Q

If an investor is bullish they should…

A
  • buy calls (limited risk)

- sell puts (large risk)

23
Q

If an investor is bearish they should…

A 
Buy puts (limited risk)
Sell calls (unlimited risk)
24
Q

If an investor is long stock and wants protection they should…

A

Buy puts

25
Q

If an investor is long stock and wants income they should…

A

Sell covered calls

26
Q

If an investor is short stock and wants protection they should…

A

Buy calls

27
Q

If there is a halt in the trading of a security that underlies option contracts, who makes the decision to stop trading the options contract?

A

The exchange on which the option trades

Series 7 (7 decks)

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