Customer Account Supervision & Business Conduct Flashcards
If there is a material change in an option account holder’s financial situation:
A a new Options Disclosure Document must be sent
promptly
B the customer’s Options Agreement and account
documentation must be updated promptly
C only closing trades can be accepted in the account until
the customer signs a new Options Agreement
D the account must be frozen until a new suitability
determination is completed
B.
On customer statements, there must be a legend that states that the customer must notify the member firm promptly if there is a material change in the customer’s investment objectives or financial situation. The member firm will use this information to update the account file and Options Agreement, as necessary. There is no requirement to freeze the account; nor to only accept closing trades in the account.
As the initial transaction in a long margin account, a customer buys 100 shares of ABC stock at 38 and writes 1 ABC Jan 40 Call @ $4. The contract is exercised just prior to expiration. What is the customer's "out of pocket" rate of return? A 20% B 30% C 38% D 50%
C.
To establish the account, minimum equity of $2,000 is required. The purchase of the stock generates a Regulation T. requirement of 50% of $3,800 = $1,900. Since this is the initial transaction, the minimum margin of $2,000 must be met, so this is the requirement; the balance of $1,800 is lent to the customer in the form of a debit balance. The sale of the covered call has no margin requirement. The sale of the call earns $400 in premiums, so the customer must deposit the additional $1,600. If the call is exercised, the writer receives $40 per share for the stock, or $4,000. The $1,800 debit balance in the account must be repaid, leaving net proceeds of $2,200 for the customer. This is $600 more than the original cash investment of $1,600. The cash return on cash investment is:
Cash Return = $600 = 38%
Cash Investment $1,600
Which of the following options transactions taken against an appreciated underlying stock position held short term causes the stock's holding period to revert to "0"? A Buy a put on that stock B Sell a put on that stock C Buy a call on that stock D Sell a call on that stock
A.
The intent of the rules regarding the effect of options positions on stock holding periods is to stop people from “locking in” a short term gain and “stretching it” to a long term gain - taxed at preferential rates. If a put is purchased while the stock is held short term, allowing the holder to put the stock at a fixed price even if the market declines, the holding period stops counting and reverts to “0.” Thus, when the stock is sold, it has no holding period, and any gain is taxed as short term.
Note that the sale of a call against a stock position, if the call is not “qualified” (meaning the call is too deep in the money), stops the counting of the holding period - it does not take it back to “0.”
A customer buys 1 ABC Jan 50 Put @ 2 and sells 1 ABC Jan 60 Put @ 5 when the market price of ABC is 58. The customer must deposit: A $200 B $300 C $700 D $1,000
C.
The customer has created a credit spread:
Buy 1 ABC Jan 50 Put @ $2
Sell 1 ABC Jan 60 Put @ $5
$3 Credit
The customer receives $300 in premiums for exposing himself to a potential 10 point ($1,000) loss on the options (obligated to buy at 60 under the short put; can sell at 50 with the long put). The potential loss must be deposited which is $1,000 - $300 collected = $700.
A designated ROP wishes to delegate the review of options account transactions to another person. Which statement is TRUE?
A Delegation of this responsibility is prohibited
B Delegation is permitted if that person is registered with
the options exchange as a designated ROP
C Delegation is permitted if the designated ROP
establishes separate review procedures to ensure that
the delegated authority is being properly exercised
D Delegation is permitted to any person that is a branch
office manager
C.
The designated ROP is permitted to delegate supervisory duties as long as he or she establishes procedures to ensure that the delegated authority is being properly exercised.
Customers must receive which of the following semi-annual reports from the broker-dealer? I Broker-dealer balance sheet II Broker-dealer computed net capital III Broker-dealer income statement A I only B I and II C II and III D I, II, III
B.
Customers must be sent an annual audited balance sheet of the broker-dealer. along with the firm’s computed amount of net capital. They must also be sent the same computations at mid-year, but these are unaudited. There is no requirement to provide customers with a copy of the firm’s income statements.
All of the following would be considered to be options advertising EXCEPT: A Billboard announcement B Internet advertisement C Tape recording D Form letter
D.
Any communication targeted to a specific audience, such as the firm’s customers, is considered to be sales literature, not advertising. Examples, include research reports, market letters, password-protected websites, and form letters. A form letter sent to more than 25 existing or prospective customers is sales literature (if 25 or less then, it is correspondence). All of the other choices are “general public” communications and, thus, are advertising.
Which of the following must be approved by the designated ROP prior to use? A Completed options worksheets B Retail communications C Options Correspondence D Institutional communications
B.
All options retail communications (except for completed options worksheets) must be approved by the ROP designated in the firm’s supervisory procedures prior to use.
Correspondence does not require prior ROP approval as long as the firm has implemented a program of supervisory procedures. Then it gets post-use review and approval by either a designated ROP or BOM.
Similarly, as long as the firm has procedures in place for post-use review and approval by a designated ROP, institutional communications do not require prior approval.
Copies of executed discretionary options order tickets must be maintained on file for: A 1 year B 3 years C 5 years D 7 years
B.
Order ticket copies must be retained by member firms for 3 years.
A market maker on the CBOE displays a quote without any qualifications (size not specified). This quote is good for:
A 1 contract
B 10 contracts
C 100 contracts
D the smallest order presented on the floor at that time
B.
Quotes by market makers on the CBOE that do not specify a size are good for 10 contracts.
The "spread priority rule" affords precedence to: I one-on-one transactions II accommodation liquidations III simultaneous purchase and sale of option positions A I only B II only C I and III D I, II, III
C.
Accommodation liquidations are simply a means of closing out worthless contracts for an aggregate premium of $1. They have no bearing on the spread priority rule.
This rule gives priority to “combination” orders (e.g., spreads and straddles) that require 2 positions to be filled at 1 net debit or credit. Choice III describes a spread position and falls under the rule.
A “one-on-one” transaction describes an order that requires one trade followed by another (e.g., a long straddle requires the purchase of a call and the purchase of a put) and also falls under the rule.
An order to be filled in its entirety, or canceled, is known as a(n): A Immediate or Cancel Order B All or None Order C One Cancels the Other Order D Fill or Kill Order
D.
A “Fill or Kill” order must be filled in its entirety in one attempt, or it is canceled.
An order placed “All or None” must also be filled in its entirety, but if execution is not possible, the floor trader can reattempt a later execution. This order is not canceled.
An immediate or cancel order requires execution in part or in full, in one attempt. The unexecuted portion of the order is canceled.
A “One Cancels the Other” order (OCO) is a type of contingency order. If one side of the order is executed, the other side is canceled.
Which statements are TRUE regarding LEAP index option contracts?
I LEAP index contracts have shorter initial expirations than regular index contracts
II LEAP index contracts have longer initial expirations than regular index contracts
III LEAP index contracts have higher initial time premiums than regular index contracts
IV LEAP index contracts have lower initial time premiums than regular index contracts
A I and III
B I and IV
C II and III
D II and IV
C.
LEAPs are long term options contracts. LEAP index options have a maximum initial life of 36 months.
Regular index options have a maximum initial life of 4 months. Because LEAPs have a longer life, they have a longer time premium.
Which statements are TRUE?
I OEX options, if exercised are AM settled
II OEX options, if exercised are PM settled
III SPX options, if exercised are AM settled
IV SPX options, if exercised are PM settled
A I and III
B I and IV
C II and III
D II and IV
C.
The OEX (Standard and Poor’s 100 Index options) was the very first index option created in 1979. It was modeled after stock options, so it is American style.
It can be exercised every day, and any exercise is “PM” settled using the closing prices of the stocks in the index on the day of exercise as the basis for the calculation of the index value. Because of PM settlement, these can be both traded and exercised through the 3rd Friday of the expiration month.
The SPX (Standard and Poor's 500 Index option) came later, and like the vast majority of the later index options, it is European style. European style index options can only be traded until the close of the CBOE on the 3rd Thursday of expiration month. On the morning of the 3rd Friday, because these index options are "AM" settled, the value of the index is calculated. Any open contracts that are "in the money" by $.01 are automatically exercised by the OCC on this day.
Customer background information should be kept in which of the following locations? I Registered Representative Office II Branch Office III Office of Supervisory Jurisdiction A I only B II only C I and III only D I, II, III
D.
Exchange rules require that customer new account information be kept in both the branch office and the central Office of Supervisory Jurisdiction.
In the branch, the registered representative would keep a copy of the new account information, and the principal would have his own file of all new account cards for all representatives.
