Options

Question 1

Option Premium Formula

Answer 1

Premium = Intrinsic Value + Time Value
IV: In the money amount
Time Value: time to expiration, market volatility

Question 2

Life of an Option

Answer 2

Standard: 9 months (max)
LEAPS: lives up to 3 years

Question 3

Close-Out (vs exercise)

Answer 3

Means trade, NOT exercise. Investor executes an opposite transaction on the same series of option.

Question 4

American Style Option

Answer 4

Exercised any time up to expiration. Always for equity.

Question 5

European Style Option

Answer 5

Only exercised day preceding expiration. Always for foreign currency.

Question 6

Long Straddle

Answer 6

Buy a call and put: seeking volatility

Question 7

Short Straddle

Answer 7

Sell a call and a put: seeking stability

Question 8

Straddle vs. Combination

Answer 8

Straddle: same expiration month and strike
Combo: dif expiration months and/or dif strike

Question 9

Spread

Answer 9

Sale and purchase of two options of the same type of option and different strikes

Question 10

Buyer of spread = debit

Answer 10

= desire for widening (5 letters (buyer) –> 6 letters (debit/widen))

Question 11

Seller of spread = credit

Answer 11

= desire to narrow (number of letters in all words stays the same)

Question 12

Vertical Spread: Dominant Leg

Answer 12

Option w/ larger premium, determines if investor is buyer/seller
For calls: this is lower strike price
For puts: higher strike price

Question 13

Index Options

Answer 13

If exercised: receive or deliver CASH. Settlement is NEXT BUSINESS DAY. Broad based indices: S&P100 (OEX), S&P500 (SPX), Willshire

Question 14

VIX Options

Answer 14

Moves opposite direction of market. Based on PREMIUMS for SPX options over next 30 days. Cash settled.

Question 15

Foreign Currency Options

Answer 15

Spec/hedge movement of exchange rates on foreign currencies relative to USD. Interbank market: market in which currency spot prices are established, unlimited hrs, unregulated, decentralized. Currency options trade on Philly Stock Exchange.
REMEMBER: NO DOLLAR OPTIONS
1 point = $100 (2.25=$225).
You deliver cash in USD, not currency.

Question 16

Yield Based Options

Answer 16

Based on YIELD of Treasuries. Exercise causes deliver of cash.

Question 17

Option Account Opening Procedure

Answer 17

1) Gather client info through Option Acct. Agreement
- Send OCCs options disclosure doc (ODD)
2) Registered Options Principal Approval
- approval to certain levels of trading
3) Allow “opening” transaction (after approval)
4) Within 15 days AFTER approval, client must sign and return agreement. If not, only closing transactions permitted.

Question 18

Deadlines for Equity Options

Answer 18

Expiration: 11:59PM ET on Sat following 3rd Fri of month
Trading: 4:00PM ET on business day before expiration
Submission of exercise notice to broker: 5:30PM ET on business day before expiration
AT expiration OCC auto exercises all options that are in the money buy at least $.01

Question 19

Exercise Limits

Answer 19

Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply CUMULATIVELY to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.