Equity (Stock) Options Flashcards
What does the OCC do?
Standardizes options contracts
Issues guarantees contracts
Acts as clearing house for all listed option trades
What are the main OCC contract specifications?
- Contract size (100 shares)
- Strike price intervals
- Premium INCREMENTS (pennies or more; 5 cents for below $3, and 10 cents for above $3)
- Expiration date (3rd Friday each month, 11:59pm ET)
- Expiration (spot and next month, plus next 2 cycle months)
- Trading hours
- Trading cut off
- Exercise cut off
What are the cycles for options?
Cycle 1 - Jan, Apr, Jul, Oct
Cycle 2 - Feb, May, Aug, Nov
Cycle 3 - Mar, Jun, Sep, Dec
What is the actual and legal (technical) maximum life of a stock option contract?
actual = 8 legal = 9
What are the trading hours for stock options?
9:30 - 4:00 ET
What is the last time to exercise an option?
5:30 pm ET
What is the last time to trade (trade cutoff)
4:00 pm ET
What is the settlement time for options TRADES?
Next business day (for trades)
Who does a customer notify if he exercises?
Brokerage firm, who tells OCC
How does the OCC select a short contract to be exercised when they get exercise notice from brokerage firm?
On a RANDOM basis
How does a brokerage firm select a customer to be exercised?
On a FIFO or random basis
What is the settlement time for options EXERCISES?
3 Business days after exercise date
What is a position limit?
The OCC limits the number of positions someone can take on the same “side” of the market
What does the upside of the market consist of?
Long calls and short puts (bullish)
What does the downside of the market consist of?
Short calls and long puts (bearish)
What is Acting in concert?
Prohibited by FINRA. Accounts that are under common control. I.e through
- joint accounts
- partner accounts
- common director/mgmt accouunts
- an individual with authority to execute trades in an account
What are exercise limits?
Limits # of contracts that can be exercised within any 5 BUSINESS day period
What type of dividends cause contracts to be adjusted?
Whole share splits (2:1, 4:1, etc)
What types of contracts do not cause contracts to be adjusted?
Cash dividends or Fractional share splits (ie 20% stock dividends)
How can you cover a CALL writing position?
- Long underlying stock (or warrant/convertible)
- Long call at same strike price or lower
- Long an escrow receipt for the stock (not with a broker)
- Bank guarantee letter
How can you cover a PUT writing position?
- Short the underlying stock
- Long a put at same strike or HIGHER
- Escrow receipt for cash
- Bank guarantee letter
What are some basics to LEAPS?
- Long term Equity Options
- Expiration is 30 months
- Protect investors for market movements that cover longer time period
What is the option TYPE?
Either a call or a put
What is an option CLASS?
One underlying issue (All ABC, XYZ, etc)
What is an option SERIES?
All contracts within same CLASS with Same STRIKE and EXPIRATION
