Equity Options

Question 1

Call option

Answer 1

Gives the buyer the right to purchase 100 shares of the stock at a set exercised price for a limited of time

Question 2

Put Option

Answer 2

Gives the buyer the right to sell 100 shares of stock at a set price for a limited time

Question 3

Short an option

Answer 3

You are the seller

Question 4

Long an option

Answer 4

You are the buyer

Question 5

Exercise Price

Answer 5

is the set price at which the holder/buyer of an option can buy or sell the stock

Question 6

Premium

Answer 6

Is the price at which an option contract is paid for

Question 7

Hedging

Answer 7

Is protecting a stock position you already have

Question 8

Opening Purchases

Answer 8

Buying a call or buying a put

Question 9

Closing Sales

Answer 9

Sell a call or sell a put

Question 10

Opening Sales

Answer 10

Sell a call or sell a put, tickets must be marked as “covered or uncovered”

Question 11

Closing Purchases

Answer 11

Buy a call or Buy a put / eliminating or reducing a short position

Question 12

Features of call buying

Answer 12

1. unlimited upside profit
2. Limited loss potential
3. leverage and diversification
4. Secures a future price
5. Hedge a short sale

Question 13

Reasons for writing / selling a call

Answer 13

1. Receive premium income when the market is down
2. Improve rate of return

Question 14

Covered Call Writing

Answer 14

1. Premium income with downside protection
2. Conservative option

Question 15

A call writer will be considered covered

Answer 15

1. owned the stock or
2. obtained and Escrow or Depository Receipt from the bank
3. was long a call with an equal or lower exercise price

Question 16

Options are classified as

Answer 16

Capital Assets

Question 16

Uncovered call writing

Answer 16

is the most speculative position

-Receives a premium income but has unlimited loss potential

Question 17

The breakeven calculation on a call

Answer 17

exercise price + premium = Breakeven on a call

Question 18

The breakeven on a put

Answer 18

exercise price - premium = breakeven on a put

Question 19

Buy stock (call) if exercised

Answer 19

-Unlimited profit potential
-Limited loss potential
- Max loss premium

Question 20

Sell stock (call) if exercised

Answer 20

-Limited profit
-Limited loss if covered
Unlimited loss if uncovered

Question 21

Options clearing Corporations (OCC)

Answer 21

is the issuer, clearing agency and guarantor of all listed option in the US

Question 22

Bid

Answer 22

is the price an investor would receive if they sell an option (lower)

Question 23

Ask

Answer 23

is the price an investor would pay if they buy an option (higher)

Question 24

Exercise cut off time

Answer 24

5:30pm eastern time on the third Friday of the expiration month

Question 25

In-the-money (call up)

Answer 25

occurs when the market price of the stock is greater than the exercise price

Question 26

Out-of-the-money

Answer 26

occurs when the market price of the stock is less the exercised price

Question 27

Long-term equity anticipation securities (LEAPS)

Answer 27

are long term options on stocks and on stock indexes

Question 28

LEAPS expirations

Answer 28

Equity leaps: 39 months
Index leaps: 39 months

Question 29

Exercise settlement (LEAPS)

Answer 29

Equity leaps: will settle in stock on the second business day
Index leaps: will settle in cash the next business day

Question 30

Index Options

Answer 30

are options that mirror a specific index and settle in cash

Question 31

Options Disclosure Document (ODD) delivery requirements

Answer 31

-must be furnished with a current ODD at or before the time of account approval
-if there are changes, customers must have a revised ODD no later than the time that their next confirmation is sent

Question 32

Opening a new options accout

Answer 32

a. obtain essential facts
b. provide the customer with a ODD at or before the time the account is approved
c. get the account approved by the securities sales supervisor
d. the option account agreement must be received by the member firm within 15 days from the time the account is approved
e. background and financial information must be sent to the customer for verification within 15 calendar days after account is approved