Equity (Stock) Options

Question 1

What does the OCC do?

Answer 1

Standardizes options contracts
Issues guarantees contracts
Acts as clearing house for all listed option trades

Question 2

What are the main OCC contract specifications?

Answer 2

• 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

Question 3

What are the cycles for options?

Answer 3

Cycle 1 - Jan, Apr, Jul, Oct
Cycle 2 - Feb, May, Aug, Nov
Cycle 3 - Mar, Jun, Sep, Dec

Question 4

What is the actual and legal (technical) maximum life of a stock option contract?

Answer 4

actual = 8
legal = 9

Question 5

What are the trading hours for stock options?

Answer 5

9:30 - 4:00 ET

Question 6

What is the last time to exercise an option?

Answer 6

5:30 pm ET

Question 7

What is the last time to trade (trade cutoff)

Answer 7

4:00 pm ET

Question 8

What is the settlement time for options TRADES?

Answer 8

Next business day (for trades)

Question 9

Who does a customer notify if he exercises?

Answer 9

Brokerage firm, who tells OCC

Question 10

How does the OCC select a short contract to be exercised when they get exercise notice from brokerage firm?

Answer 10

On a RANDOM basis

Question 11

How does a brokerage firm select a customer to be exercised?

Answer 11

On a FIFO or random basis

Question 12

What is the settlement time for options EXERCISES?

Answer 12

3 Business days after exercise date

Question 13

What is a position limit?

Answer 13

The OCC limits the number of positions someone can take on the same “side” of the market

Question 14

What does the upside of the market consist of?

Answer 14

Long calls and short puts (bullish)

Question 15

What does the downside of the market consist of?

Answer 15

Short calls and long puts (bearish)

Question 16

What is Acting in concert?

Answer 16

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

Question 17

What are exercise limits?

Answer 17

Limits # of contracts that can be exercised within any 5 BUSINESS day period

Question 18

What type of dividends cause contracts to be adjusted?

Answer 18

Whole share splits (2:1, 4:1, etc)

Question 19

What types of contracts do not cause contracts to be adjusted?

Answer 19

Cash dividends or Fractional share splits (ie 20% stock dividends)

Question 20

How can you cover a CALL writing position?

Answer 20

• 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

Question 21

How can you cover a PUT writing position?

Answer 21

• Short the underlying stock
• Long a put at same strike or HIGHER
• Escrow receipt for cash
• Bank guarantee letter

Question 22

What are some basics to LEAPS?

Answer 22

• Long term Equity Options
• Expiration is 30 months
• Protect investors for market movements that cover longer time period

Question 23

What is the option TYPE?

Answer 23

Either a call or a put

Question 24

What is an option CLASS?

Answer 24

One underlying issue (All ABC, XYZ, etc)

Question 25

What is an option SERIES?

Answer 25

All contracts within same CLASS with Same STRIKE and EXPIRATION