Chapter 9 (1 Q) Types and Characteristics of Derivative Securities Flashcards
Opening an Options Account
No specific rule in NASAA
Must have a designated supervisor approving accounts
Have to fill out the Options Disclosure Document (ODD)
Asks about investment experience and knowledge
Options
Derivative securities (derive value from an underlying instrument)
Buyer receives the right, seller has the obligation
All options are for 100 shares
Option cost is called a premium and is dollars per share
American vs European Style options
American= Anytime exercise
European= Expiration date
Straddle
Buying a put and a call of one security
Seeking volatility in the price
Covered Calls
Considered the most conservative option strategy
Writing a naked call is considered the most risky strategy
Forward Contracts
Exchange commodities at a future date for a specific price
Considered illiquid
Each party risks the credit and trustworthiness of the other
Futures
Exchange traded commodity obligations
Gains are credits
Losses are debits
All accounts must be settled before opening of trading the next day on futures contracts
98% of futures are offset at the clearing house before actual delivery
Higher price means that the buyer of the contract earned a profit
A farmer would sell a contract to lock in the price they will receive
Do not come under supervision of SEC