Exam 2 Flashcards
Options trade blotters must be retained: A for a minimum of 1 year B for a minimum of 6 years C until settlement of the transaction D for as long as the firm remains open
B.
Trade blotters are a “record of original entry” that must be retained for 6 years by the member firm. The other blotters that must be retained for 6 years are the cash receipts and disbursements blotter; and the securities receive and deliver blotter.
Initial approval of each discretionary options account, in writing, is performed by the: A BOM B Designated ROP C General Principal D Financial and Operations Principal
A.
Approval of discretionary options accounts, in writing, is performed by the Branch Manager (who has the Series 9/10 license) or ROP (who has the Series 4 license).
The “designated ROP” with a Series 4 license is a compliance officer, usually in a supervisory office, that has been designated as the individual that is responsible for:
-creating and enforcing options supervisory procedures;
-for approving options accounts that will sell naked options
that do not meet firm standards;
-for reviewing discretionary orders and accounts that have been accepted by the BOM; and
-for approving communications with the public. Basically, this is the main office supervisor of options transactions and accounts.
The General Principal (Series 24) is responsible for overall firm supervision, with the exception of options. The Financial and Operations Principal (Series 27) is responsible for preparing the firm’s financial reports filed with FINRA and the SEC.
An accommodation liquidation order is a: A market order B limit order C stop order D market if touched order
B.
An accommodation liquidation order is placed by a customer who wishes to receive a closing trade confirmation for a worthless option contract. An order is placed to close the contract at an aggregate premium of $1 ($.01 per share). This is a limit order. The order book official handles these orders as an “accommodation” to the public, hence the name.
Discretionary options orders must be approved and initialed by the:
A BOM prior to execution
B BOM promptly after execution
C designated ROP in a supervisory office prior to
execution
D designated ROP in a supervisory office promptly after
execution
B.
Approval of options accounts, and transactions in accounts, is the responsibility of the Branch Office Manager (Series 9/10) or Registered Options Principal (Series 4) licensed individual located in a branch office. The Branch Office Manager or ROP must approve discretionary options account orders by initialing the order ticket on the day the order is entered - note that there is no requirement for ROP approval prior to executing the transaction. Also note that the BOM or ROP (Branch Manager), not the designated ROP (who is located in the supervisory office) performs this function.
The initial strike price of an option contract is determined by the:
A Options Clearing Corporation
B Securities and Exchange Commission
C market value of the underlying stock
D length of time until expiration of the contract
C.
The basic rule for setting of options strike prices at issuance is that the strike is based on the current market price of the stock. For example, if the strike price interval is $2.50 and a stock is trading at $18, at that moment, new contracts cannot be issued at $18, but they could be issued at, say, $17.50, $20.00, $22.50, etc. For each stock trading at $20 or less, strike prices can be issued up to 100% higher or lower; for stocks over $20, the range is +/- 50%. So if a stock is trading at, say, $50, options can be issued with strike prices ranging from $25 to $75.
A customer sells an equity LEAP contract on the first day that the option starts trading. If the contract expires "out the money," the customer will have a: A short term capital gain B short term capital loss C long term capital gain D long term capital loss
A.
If an option contract expires, the writer has a capital gain equal to the premium collected. Sellers of options are treated the same as short sellers of stock. Because a holding period is never established, a long term holding period can never exist. Thus, all gains and losses are always short term for sellers of options.
A customer buys 1 ABC Jul 50 Put @ $3. The customer lets the contract expire. Which statement is TRUE?
A The holder has a $300 capital loss as of the date the
contract was purchased
B The holder has a $300 capital loss as of the date the
contract expires
C The holder has a $4,700 capital gain as of the date the
contract was purchased
D The holder has a $4,700 capital loss as of the date the
contract expired
B.
If the holder of an option contract allows the option to expire, he or she has a capital loss equal to the premium paid on the expiration date. For tax purposes, since regular stock options have a maximum life of 9 months, the loss is short term.
Under the “wash sale rule,” a loss on the sale of a security is disallowed, if between 30 days prior to the sale until 30 days after the sale, the customer:
I buys a security convertible into that which was
sold
II buys a call option on the security which was sold
III sells a call option on the security which was sold
IV sells a put option on the security which was sold
A I and II
B III and IV
C II and III
D I and IV
A.
The wash sale rule states that if a security is sold at a loss, and from 30 days prior to the sale date until 30 days after the sale date, the same security is purchased; or an equivalent security such as a convertible is purchased; or a call option, warrants or rights are purchased; then the loss deduction is disallowed. All of these “equivalents” effectively restore long the position, “washing out” the sale.
Which of the following will affect the VIX option premium? A Time to expiration B SPX price level C SPX volatility D All of the above
C.
The VIX option is a pure price volatility indicator, based upon the expected SPX price movements over the upcoming month. It excludes the standard “Black-Scholes” options pricing formula inputs of time to expiration, stock price level, expected single stock price volatility, interest rates and dividend yields.
A customer is long 1 ABC Jan 60 Call in her options account. At the NYSE close on the 3rd Friday of the expiration month, the stock closes at $61. At 7:00 PM ET (6:00 PM CT) that day, the customer calls her registered representative and tells her that she does not want the contract to be exercised. The registered representative asks you, the BOM, whether anything can be done for the customer. Your response should be that:
A it is too late to do anything and the contract will be
automatically exercised by the OCC
B a Contrary Exercise Advice can still be filed to not
exercise the option
C the “in the money” option position can be transferred to
the house account so the client will not be exercised and
the customer account will be credited with the “in the
money” amount
D it is a rule violation to attempt to interfere with the
exercise of a listed options contract
B.
A “CEA” - Contrary Exercise Advice - is a notice that can be used to either:
-exercise an expiring option that is “out the money”;
OR
- to stop the automatic exercise of an expiring option that
is “in the money.”
CEAs are typically used after trading stops on the 3rd Friday of the month at 4:00 PM ET and are accepted until 7:30 PM ET.
For example, a CEA could be used by a customer that is long a slightly “out the money” call that actually wants to buy the underlying stock via the exercise of the option, since otherwise this option would expire. As another example, a CEA could be used by a customer that is long a slightly “in the money” call option that does not want to be automatically exercised (which occurs at 5:30 PM ET for contracts that are “in the money” by $.01). In this case, the customer would not be exercised and would not be obligated to come up with the money to buy the underlying shares.
In this example, the customer telephoned before the CEA cut-off time and can stop the automatic exercise.
A member who has filed a LOPR (Large Options Position Report) is required to update that report:
A daily regardless of whether a position has changed
B weekly regardless of whether a position has changed
C if there is a change of position, no later than T+1
D if there is a change of position, no later than T+5
D.
Member firms are required to file LOPRs (Large Options Position Reports) with the OCC if any account holds 200 contracts or more on a single stock or index on one side of the market. The rule also applies to individuals or accounts acting in concert, where the 200 position limit is applied to the aggregate. The initial report must be filed no later than T+1.
Once the report has been filed, any changes in the position must be reported for that day (and the rule gives the member firm 5 business days to file this report, for any changes that occurred within the 5-day time window). If the position falls below the 200 contract threshold, the firm must report the first time this happens (this is also reported within the 5-day change reporting window) and then discontinues filing the report. However, if the position subsequently goes above the 200 contract reporting threshold, reporting would have to start again.
The basic thrust of the rule is that the initial report of a large options position is required quickly (T+1). These reports are aggregated by the OCC by the member firm and reported. Any subsequent position change reports are not as critical, and a 5-day window (T+5) is given for filing these.
The Options Disclosure Document must be furnished to a new customer at, or prior to, the:
A opening of the account
B approval of the account for options trading
C placement of the first options trade in the account
D confirmation of the first options trade in the account
B.
The actual wording regarding the delivery of the Options Disclosure Document is as follows: “At or prior to the time a customer’s account is approved for options transactions, a member organization shall furnish the customer with one or more current options disclosure documents.”
If the ROP gives a client direct market access, which statement is TRUE?
A The firm must have automated trading controls in place
that reset the customer’s trading limit as order sizes
increase
B The firm must review at least annually the business
activity of the client to assure the effectiveness of its risk
management controls
C All orders placed by customers must flow directly to the
exchange where routed and cannot first be routed
through the broker-dealer’s internal systems
D Each order placed must be reviewed and approved by
the ROP prior to the routing of the order to the exchange
B.
SEC Rule 15c3-5 is designed to eliminate “unfiltered” market access. The background to the rule is that “rapid-fire” algorithmic trading by hedge funds and other institutional traders that had “direct access” to exchange trading systems could swamp them and cause them to crash. Therefore, the SEC requires that all broker-dealers that provide direct access to institutional clients must first put these trades through “pre-trade risk checks.”
The pre-trade controls should prevent orders from being sent if such orders:
-exceed pre-set credit or capital thresholds;
-are erroneous;
-are not in compliance with all regulatory requirements;
OR
-are for securities that the customer is restricted from
trading.
Finally, the rule requires that appropriate surveillance personnel receive immediate post-trade execution reports resulting from market access that contain information about the financial exposure faced by the broker-dealer and potential regulatory violations.
Also, broker-dealers are required to review and document, at least annually, their market access activity to assure overall effectiveness of their risk management controls, making Choice B true.
Note that Choice A is incorrect because trading limits are placed to stop “oversize orders” from being filled, exposing that firm to excessive risk – they cannot automatically resize as the customer’s order size increase. Choice D is incorrect because the controls are automated and only require post-trade review of trades singled out by exception.
The minimum equity for an individual customer to open a portfolio margin account is: A $2,000 B $25,000 C $50,000 D $100,000
D.
The minimum equity to open a portfolio margin account for an individual customer is $100,000. This compares to the minimum equity requirement of $2,000 for a regular margin account.
Which of the following is NOT a reason for trading to be halted in the affected option contract?
A Trading has been halted on the NYSE in all stocks
because the circuit breaker has been triggered
B NASDAQ MarketWatch has delayed the opening of a
stock because of a pending news announcement
C The Philadelphia Stock Exchange has stopped trading
its stocks due to a regional power disruption
D The SEC has closed the securities markets because of a
national calamity
C.
If trading of a stock is halted on the stock’s principal exchange (NYSE, NASDAQ or AMEX (now renamed NYSE American)), or if the market-wide circuit breaker is triggered due to a major decline in the S&P 500 index, then trading in the option is halted. Cessation of trading on a regional exchange, such as the PHLX, will not stop the option from trading - since it will still be trading in its principal market.
