General Questions Flashcards
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;
-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.
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.
A member firm has 3 branch offices. Branch office “A” has 3 registered representatives; branch office “B” has 38 registered representatives; and branch office “C” has 12 registered representatives. A Registered Options Principal is required to be resident in:
A either branch office “A,” “B,” or “C,” with oversight
responsibility for all 3 branch offices
B branch office “B,” with oversight responsibility for all 3
branch offices
C branch offices “B” and “C,” but not in branch office “A”
D branch offices “A,” “B,” and “C”
C.
If there are 4 or more registered persons in a branch, then there must be a resident BOM/ROP (Series 9/10 or Series 4 license) in that location. Since branch office “A” only has 3 representatives, there is no requirement for a BOM/ROP in that location.
A customer buys 100 shares of ABC stock at $50 and sells 1 ABC Jan 50 Call @ $5. Later, the 50 Call is closed, and the customer sells 1 ABC Jan 45 Call. The customer is: A rolling up B rolling down C spreading D hedging
B.
This covered call writer is “buying back” the call contract as the market declines (at a low premium since the contract is now out the money) and selling a new contract at the lower strike price (earning an additional premium). This strategy is known as “rolling down” the option position. By employing this strategy, a covered call writer continues to earn premiums as the market price of the stock falls, limiting his loss on the physical stock position
Options sales literature that is accompanied or preceded by the ODD:
I can include a recommendation of a specific
options contract
II must be approved in advance by the ROP
designated in the firm’s written supervisory
procedures
III must be filed 10 days in advance with the SRO
IV must receive approval from the SRO prior to use
A I and II only
B III and IV only
C I, II, III
D I, II, III, IV
A.
Recommendation of a specific options contract can be made in an options communication if it has been preceded or accompanied by delivery of the ODD. Note that this does not include making a recommendation of a specific options contract in general advertising. All options advertising, sales literature, and independently prepared reprints must be approved in advance by the designated ROP with a Series 4 license (this is the individual that has been designated in the firm’s supervisory procedures to approve options communications - a main office compliance function).
Regarding filing with the SRO, only advertising, sales literature, and independently prepared reprints that are NOT preceded by delivery of the ODD (Options Disclosure Document) are required to be filed with the SRO 10 days in advance and must receive SRO approval prior to use. Any communication that is accompanied or preceded by the ODD is not subject to SRO filing (which is the case here)
Which of the following has unlimited loss potential? I Short Naked Call II Short Stock/Long Call III Short Straddle IV Short Call/Long Stock
A I only
B I, III
C II, III
D I, II, III, IV
B.
Selling a naked call obligates the writer to deliver stock he does not own - thus there is unlimited risk. A short stock position is hedged by a long call - the long call allows the purchase of the stock at a fixed price, which can then be used to cover the short stock position. A short straddle involves the sale of a call and a put - both of which are naked. A naked call writer has unlimited risk. A long stock / short call position is a covered call writer - where the maximum loss would occur if the stock became worthless.
A customer buys 1 ABC Jan 50 Call and sells 1 ABC Oct 50 Call. This is a: A calendar debit spread B calendar credit spread C vertical debit spread D vertical credit spread
A.
Since Oct expires before Jan, it will be cheaper. The customer is selling the Oct 50 Call (cheaper) and buying the more expensive Jan 50 Call, so this is a debit spread.
On the same day a customer buys 1 ABC Jan 50 Call @ $2 and sells 1 ABC Jan 35 Call @ $8 when the market price of ABC is $41. The maximum potential loss is: A $600 B $800 C $900 D unlimited
C.
If the market rises, the short call will be exercised, requiring the customer to deliver the stock for $35 a share. The customer can always exercise the long call to buy the stock at $50, for a 15-point loss. Since 6 points were collected in premiums, the net loss is 9 points or $900.
On the CBOE, customer limit orders that are away from the market are handled by the: A Specialist/DMM B Market Maker C Order Book Official D Floor Broker
C.
The CBOE splits the specialist function into two. The Order Book Official handles the book of customer limit orders and takes market orders prior to opening. The Market Maker acts as the dealer in the security.
All of the following can participate in an opening rotation EXCEPT: A OBO (Order Book Official) B DPM (Desginated Primary Market Maker) C LMM (Lead Market Maker) D Floor Official
D.
The opening rotation is conducted by the Designated Primary Market Maker (DPM) or the Order Book Official (OBO). Floor Brokers can participate in the opening rotation, as can LMMs (Lead Market Makers). Floor Officials do not trade - they oversee the options trading floor.
A customer buys 100 shares of ABC stock at $55. Fourteen months later, the stock rises to $63 and the customer sells 1 ABC Jan 65 Call @ $5 and buys 1 ABC Jan 60 Put @ $5. One month later, the stock rises to $68 and the call is exercised. The customer closes the ABC Jan 60 Put @ $1. The tax consequence of these transactions is:
A $1,000 short term capital gain on ABC stock; no capital gain or loss
on the options premiums
B $1,000 long term capital gain on ABC stock; no capital gain or loss
on the options premiums
C $1,500 long term capital gain on ABC stock; $400 short term capital
loss on the options premiums
D $1,500 long term capital gain on ABC stock; $400 long term capital
loss on the options premiums
C.
This customer has a gain on a long stock position that he or she is protecting by purchasing the put; and the customer is offsetting the cost of the put purchase by selling an “out of the money” call at a premium equal to that paid for the put, creating a “zero-cost” collar on the stock position. Because the put was purchased when the stock was already held long-term, there is no effect on the stock’s holding period. The stock was bought at $55 per share. Upon exercise of the call, the stock is being sold at the strike price of $65 + $5 call premium = $70 sales proceeds for tax purposes. Thus, there is a $15 per share long term capital gain on the stock or $1,500. The put that was purchased at $5 is closed one month later at $1, for a $4 per share short term capital loss, or $400. (Also note that if the put had been purchased when the stock was held for less than 1 year, this would have stopped the counting of the stock’s holding period until the put expired or was closed by trading, at which point the stock’s holding period would resume counting.)
A customer is long 1 ABC Jan 60 Call contract. If the stock goes ex for a 3:2 stock split, all of the following statements are true EXCEPT:
A The strike price will be adjusted to $40 per share
B The contract size will be adjusted to 150 shares
C The aggregate exercise value of the contract will remain the same
D The contract expiration will be extended by 1.5 months
D.
For a 3:2 stock split, the number of shares per contract is increased and the strike price is reduced proportionally. The number of shares per contract becomes 1.5 x 100 = 150 shares; and the strike price becomes $60/1.5 = $40. Note that the aggregate exercise value of the contract remains unchanged at $6,000 (150 shares x $40 per share).
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.
On the floor of the Chicago Board Options Exchange, duties similar to those performed by the NYSE Specialist/Designated Market Maker are handled by the: A floor broker B market maker C floor trader D competitive trader
B.
The Specialist/Designated Market Maker on the NYSE floor performs 2 functions. He acts as market maker in a specific security, buying and selling for his own account. He also keeps the “book” of limit orders that are away from the market for other brokers, and executes these orders for a commission. The CBOE splits this “dual function” into two jobs. The market maker on the CBOE buys and sells for his own account but does not hold a “book” of public orders. The “book” of limit orders is handled by the Order Book Official. Note that the OBO cannot accept contingency orders such as stop orders on the book.
Any option communication that is NOT accompanied or preceded by delivery of the ODD (Options Disclosure Document) can: A make a recommendation B show past performance C project future performance D describe how options work
D. The basic rule for options communication is that:
• if the communication has been preceded or accompanied by delivery of the ODD (Options Disclosure Document), it DOES NOT require SRO filing and approval; but
• if the communication has NOT been preceded or accompanied by delivery of the ODD (Options Disclosure Document), it DOES require SRO filing and approval.
Furthermore, any options communication that is NOT preceded or accompanied by the ODD (Options Disclosure Document) is not permitted to be “promotional.” It:
• is limited to a general description of options;
• must contain information on where a copy of the ODD may be obtained;
• cannot contain recommendations;
• cannot name specific securities;
• cannot contain past performance or performance projections;
• may contain a brief description of options, the operations of the options exchanges and options pricing;
• must include any statement required by law; and
• may include attention-getting graphics, headlines and photographs, as long as they are not misleading.
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.
If a member firm solicits customers to participate in a discretionary options trading program, which of the following MUST be provided?
I Cumulative history of the program
II Projected future performance of the program
III Written explanation of the workings of the program
IV Written explanation of the tax implications of the program
A I and III
B I and IV
C II and III
D II and IV
A.
If a customer is going to give discretionary authority to a firm to engage in an options trading program, the customer must receive a written explanation of how the program works, along with the costs and risks associated with the program. In addition, the customer must be provided the program’s cumulative performance history (or unproven nature of the program, if there is no history). There is no requirement to show projected performance, nor is there is a requirement to disclose the tax treatment of strategies employed (though this does make sense as well!).
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.
A customer has a $150,000 portfolio of high-tech stocks that has a beta of +1.3 as measured against the NASDAQ 100 Index, which is currently at 40. To properly hedge the portfolio, the customer would: A Buy 38 NDQ 40 Calls B Buy 49 NDQ 40 Puts C Sell 38 NDQ 40 Calls D Sell 49 NDQ 40 Puts
B.
To hedge the stock portfolio from a market decline, index puts are purchased. The issue here is comparative volatility. The customer’s portfolio is 30% more volatile than the NASDAQ 100 Index (a beta of +1.3 indicates this), so the hedge must be “beta-adjusted.” With the NASDAQ 100 Index at 40, each contract covers a nominal portfolio value of 40 x 100 multiplier = $4,000. Since the customer has a $150,000 portfolio, then $150,000/$4,000 = 37.5 = 38 contracts (rounded) would be needed to hedge if the betas matched. But they don’t - the portfolio beta is 30% more volatile than the NASDAQ 100 Index, so 1.3 times the normal number of contracts (1.3 x 37.5 = 49 contracts rounded) are needed to hedge.
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.”
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.
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.
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.
A registered representative in your branch has a client who placed an order to buy 10,000 ABCD Jan 50 Calls @ $3.00. The order was filled in 2 trades - the first fill was 5,000 ABCD Jan 50 Calls @ $3.00; the second fill was 5,000 ABCD Jan 50 Calls @ $3.05. The trade is confirmed by the firm to the client as being filled in full at an average price of $3.00. Which statement is TRUE about this?
A The trade was filled and confirmed properly because the customer
was given the desired price
B The second trade at $3.05 should be taken out of the customer
account and placed in the branch error account; in addition, the
customer must be sent a revised confirmation showing that 5,000
contracts were purchased at $3.00, not 10,000 contracts
C Because the order was filled in two separate trades of 5,000 contracts
each, and not filled as one 10,000 contract trade, the trade must be
placed in the branch error account and a confirmation showing
cancellation of the trade must be sent to the customer
D Because the 5,000 contract fill at $3.05 exceeded the $10,000 limit for
branch error accounts, it cannot be placed in the branch error account
and must be taken to the firm’s proprietary trading account; in addition,
a corrected confirmation must be sent to the customer showing that
only 5,000 contracts were purchased at $3.00
B.
The customer placed an order to buy 10,000 contracts at $3. 5,000 contracts were purchased at $3.00, meeting the customer limit; while the remaining 5,000 contracts were purchased at $3.05 - exceeding the customer limit. The average fill price for 10,000 contracts is $3.025, which exceeds the customer limit. If the firm were to confirm all 10,000 contracts to the client as purchased at $3.00, it is, in effect, guaranteeing a price to the client of $3, which is prohibited. The trade of 5,000 contracts purchased at $3.05 should be taken out of the customer account and placed in the branch error account.
Which of the following information MUST be included in the central file of options complaints? I Date of receipt of complaint II Name of complainant III Name of registered representative servicing the account IV Record of action taken, if any A I and II only B III and IV only C I, II, III D I, II, III, IV
D.
The CBOE requires that member firms keep a central file of customer options complaints in the firm’s principal place of business. That way, if the CBOE audits a firm, they do not have to go to each branch to examine the complaint file. They can go to the 1 central file, and based on their findings, then go visit the branches about which they have questions. The central file must include:
1. Identification of complainant
2. Date complaint was received
3. Identification of registered representative servicing the account
4. General description of matter complained of
5. Record of action taken, if any
A copy of each complaint received must be forwarded to the central file within 30 days of receipt; and a copy must be retained in the branch as well.
Which of the following individuals CANNOT buy options for his own account? I Order Book Official (OBO) II Specialist/DMM (Designated Market Maker) III Market Maker (MM) IV Floor Broker A I and IV only B II and III only C III and IV only D I, III, IV
A.
The Order Book Official on the CBOE maintains a book of limit orders that are “away from the market” for public customers. The OBO executes these orders on an agency basis, and is prohibited from trading for his or her own account. The Floor Broker acts as an agent, handling transactions for his firm, or for other firms. Floor brokers are also prohibited from trading for their own accounts. On the American Stock Exchange and the Philadelphia Stock Exchange, there are Specialists/Designated Market Makers that are market makers in options. They can buy for their own account. On the CBOE, there is no Specialist. Instead, there is a designated market maker, who acts solely as principal in transactions. The “book” functions performed by Specialists are handled by OBOs on the CBOE.
An officer is granted options to buy restricted shares of his company’s stock. Under Rule 144, the officer’s holding period in that stock commences (starts):
A on the day that the options are granted
B on the day that the options are exercised
C on the day that the stock is delivered
D when the Form 144 is filed with the Securities and Exchange
Commission
B.
Under Rule 144, the holding period for restricted stock commences on the “trade” date. For holders of call options or warrants, this is the day the options or warrants are exercised.
A customer enters an order to buy 10 XYZ Jan 50 Calls @ $4. A trade occurs at that price, but the customer’s order is not executed. This would occur because there were:
I buy limit orders at the same price for other customers ahead of
this order
II buy limit orders at the same price for other member firms ahead
of this order
III spread orders that required the purchase of the same option
ahead of this order
IV buy limit orders at the same price for market makers ahead of this
order
A I only
B II and IV only
C I and III only
D I, II, III, IV
C.
Prior to executing orders for the firm account at the same, or better prices, any existing customer orders at those prices must be filled. The firm is prohibited from “front running” customer orders. Market makers on the CBOE floor are permitted to trade for their own accounts at prices that do not compete with existing customer orders - otherwise the customer orders have priority. Since customer limit orders are filled on a “first in, first out” basis, an existing customer limit order might not be filled if there were orders ahead of this customer order. Because of the “spread priority rule” which gives preference to filling spread and straddle orders on the trading floor, an existing customer buy limit order might not be filled because one “leg” of the spread or straddle position was filled at the same price and took priority.
Portfolio margining is: I risk based II strategy based III calculated using Regulation T rules IV calculated using probability-based loss percentages A I and III B I and IV C II and III D II and IV
B.
Portfolio margin is a “risk” based margin method that gives substantially lower margin requirements for lower risk positions. It recognizes that if positions are hedged, such as a stock position hedged by the purchase of a put, then the loss potential of the combined position is much lower. Portfolio margin produces a much lower margin requirement for such a hedged position (the margin is basically equal to the maximum loss) than the separately calculated margins for each position that Regulation T would require. Regulation T is a so-called “strategy based” margin method, that applies a fixed margin percentage to each strategy separately. It does not account for the fact that one position may offset the risk of another position, which is what portfolio margin recognizes. Also note that portfolio margin can only be used by institutional or wealthy sophisticated individual customers.
The ROP designated by the firm’s written supervisory procedures may:
I Delegate responsibility for supervising options orders and
accounts at each branch to qualified employees
II Delegate authority for supervising options orders and accounts at
each branch to qualified employees
III Delegate overall responsibility and authority for supervising
options orders and accounts at each branch to qualified
employees
A I only
B II only
C I and II
D I, II, III
C.
The designated ROP is a person so designated to the Exchange, and is physically located in a supervisory office.
The designated ROP is responsible for: - Developing and implementing a written program for the review of customer options accounts and orders in customer options accounts. - Must also develop and implement specific written procedures for the supervision of naked short options writing, providing for frequent supervisory review of such accounts. - To give specific approval to new accounts that wish to write naked short options that do not meet the specific criteria of the firm to do so. - Given the responsibility to review the acceptance of each discretionary account approved by Branch Office Managers or Registered Options Principals.
In meeting his or her responsibility, the designated ROP may delegate to qualified employees, responsibility and authority for supervision and control of each branch office, provided that the designated ROP has overall authority and responsibility for such persons. Thus, the designated ROP can delegate to the Branch Office Manager (Series 9/10 license) or another Registered Options Principal (Series 4 license) authority and responsibility for supervision of options accounts and transactions in that branch; overseen by the designated ROP in the supervisory office.
When reviewing customer account activity, the BOM notices that a client that is long 5,000 shares of ABC stock has just purchased 500 ABC Call contracts. The main concern of the BOM should be:
A whether the customer has sufficient funds to pay for the ABC stock
should the calls be exercised
B the fact that the customer has a concentrated position in ABC stock
C whether the customer has been qualified for the appropriate level of
options trading
D the fact that the customer is in violation of speculative option position
limits
B.
Since the customer is long the call contracts, the customer gets to choose whether or not to exercise, so Choice A is not a concern. The customer already owns 5,000 shares of ABC stock and now has the option to buy 50,000 (500 contracts x 100 shares) additional ABC shares, so the customer is very exposed to an ABC price decline. The customer’s concentrated position in ABC stock is a concern, making Choice Bcorrect. Choice C is not the main concern because the firm should have policies and procedures in place that do not allow customer options trading unless the account is properly qualified. Choice D is not a concern because options position limits occur at much higher levels.
An “in the money” European style index option that has not been closed by trading will:
I be automatically exercised on the third Thursday
of the month
II be automatically exercised on the third Friday of
the month
III have the index value calculated based on the
closing prices of the stocks in the index on the
third Thursday of the month
IV have the index value calculated based on the
opening prices of the stocks in the index on the
third Friday of the month
A I and III
B I and IV
C II and III
D II and IV
D.
European style index options, which are the vast majority of 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. Because index options exercises settle in cash, the writer pays the holder the calculated “in the money” amount the next business day
