Chapter 16 Flashcards
Options Account Opening Procedures, Taxation, and Trading Markets
Designated Primary Market Makers (DPM’s)
- act as principals
- Purchasing and selling option contracts for their own personal account
Floor Brokers
- act as agents
- executing orders for both the public and other members
Order Book Official (OBO)
- maintain the public customer limit order book
- acts as as broker’s broker
- responsible for recording and executing these orders
Legging in/out
The process of buying or selling each option separately (with spreads, straddles, combinations, etc.)
Exercise Limit
Maximum number of contracts that an investor may exercise withing five consecutive business days
Deadlines for standardized option contracts
- 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
When do standard equity option trades settle?
Next business day
T+1
When do settlements of an standard exercised option occur?
Two business days
T+2
Non-Equity Option Expiration
- 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
LEAPS Expiration
-39 months
Advantages of LEAPS
- 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
Even Stock Splits adjustments
- Increase in the number of option contracts
- Decrease in exercise price
Odd Stock Splits adjustments
- Increase in the number of shares underlying the contract (no longer 100)
- decrease in the exercise price
Reverse Stock Split adjustments
- Reduction in the number of shares (no longer 100)
- Increase in the exercise price
Stock Dividend adjustment
SAME AS ODD STOCK SPLIT
- Increase in the number of shares underlying the contract (no longer 100)
- decrease in the exercise price
Gather customer information through Options Account Agreement
- financial status, objectives, experience
- date need NOT be verified, but copy sent for customer signature
- Send OCC Risk Disclosure Document AT OR PRIOR
Registered Options Principal Approval (ROP)
- must determine account is suitable
- Not officially open until this step
Allow opening Transactions
-ONLY AFTER approval by ROP
Signature of the Options Account Agreement
- Within 15 days of the ROP’s approval
- if not received, only closing transactions would be permitted
What would happen if an account is exercised?
- 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
Married Put
- 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
If an investor is bullish they should…
- buy calls (limited risk)
- sell puts (large risk)
If an investor is bearish they should…
Buy puts (limited risk) Sell calls (unlimited risk)
If an investor is long stock and wants protection they should…
Buy puts
