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series 7 take 2 > options > Flashcards

options Flashcards

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Series 7 Top-off Exam flashcards
1
Q

2 parts to a options contract

A

buyer and seller

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2
Q

describe buyer of an options contract

A
  • purchaser/holder
  • long
  • pays premium for the right to exercise contract
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3
Q

describe seller of an options contract

A
  • seller/writer
  • short
  • receives premium for the obligation to sell if contract is exercised
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4
Q

1 contract of an equity options contract =

A

100 shares

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5
Q

1 premium of an equity options contract =

A

$100

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6
Q

what is the intrinsic value?

A

difference between strike price and current market value of stock

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7
Q

calculate intrinsic value:

xyz july 40 call, xyz stock trading @ 43

A

43 - 40 = 3

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8
Q

exercising american way

A

option contracts can be exercised anytime

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9
Q

exercising european way

A

option contracts can be exercised on last trading day only

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10
Q

when do option contracts expire?

A

expire in on the 3rd friday in the 9th month

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11
Q

describe LEAPS

A

longer maturity options contract

-expire in 30-39 months usually

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12
Q

describe same classes of options

A

they are the same type and same stock

-all ABC calls

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13
Q

describe same series of options

A

they are the same type, stock, strike price, and expiration

-all ABC sept. 30 calls

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14
Q

describe owners and sellers of calls

A

owners-pay premium for right to buy

sellers-receives premium for obligation to sell

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15
Q

market attitude for calls and puts in bullish markets

A
  • buy calls

- sell puts

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16
Q

market attitude for calls and puts in bearish markets

A
  • sells calls

- buy puts

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17
Q

cheat for premiums and strike prices when calculating calls and puts

A
  • calls match (premium + strike price on same side of T-chart)
  • puts cross (premium + strike price on opposite side of T-char)
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18
Q

describe a bullish long call position

A

be- strike price + premium
max gain- unlimited
max loss- premium

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19
Q

describe a bearish short call position

A

be- strike price + premium
max gain- premium
max loss- unlimited

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20
Q

what is a good way to increase income on portfolio?

A

write covered calls

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21
Q

what is time value?

A

the amount of an options premium that exceeds intrinsic value

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22
Q

formula for calculating time value

A

PIT

premium - intrinsic value = time value

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23
Q

what factors determine time value?

A
  • amount of time remaining

- volatility of stock

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24
Q

describe owners and sellers of puts

A
  • owner- pays premium for right to sell

- seller- receives premium for obligation to buy

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25
Q

describe a bearish long put position

A

be- strike price - premium
max gain- be to 0
max loss- premium

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26
Q

describe a bullish short put position

A

be- strike price - premium
max gain- premium
max loss- be to 0

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27
Q

what is the purposes of a hedge positions against stock?

A

for protection - buy

for income - sell

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28
Q

what kind of option position would hedge against a long stock position?

A
  • buy put (most protection)

- sell call (make income on premium received)

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29
Q

buy a ____ to protect long stock position

A

put

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30
Q

buy a ____ to protect short stock position

A

call

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31
Q

definition of a straddle

A

buy a call and buy a put or sell a call and sell a put (same stock, same expiration, same XP)

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32
Q

what does buyer expect when buying a long straddle?

A

buyer expects volatility of the stock but direction is unknown

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33
Q

describe when a long straddle is profitable

A

when the price of stock is outside of BE points

34
Q

max gain on a long straddle?

A

unlimited

35
Q

describe when a short straddle is not profitable

A

when the price of stock is between BE points

36
Q

max loss on a long straddle?

A

price of 2 premiums paid

37
Q

describe when a short straddle is profitable

A

when the price of stock is inside of BE points

38
Q

max gain on a short straddle?

A

price of 2 premiums received

39
Q

describe when a short straddle is not profitbale

A

when the price of stock is outside of BE points

40
Q

max loss on a short straddle?

A

unlimited

41
Q

what does buyer expect when buying a short straddle?

A

used when little volatility is expected

42
Q

definition of call spread

A

buy call and sell call

43
Q

definition of put spread

A

buy put and sell put

44
Q

describe a vertical spread

A

different strike prices (price, money)

45
Q

describe a horizontal spread

A

different expiration only (calendar, time)

46
Q

describe a diagonal spread

A

different strike price and expiration

47
Q

max gain on credit spread

A

net credit

-is the difference in premiums

48
Q

max loss on credit spreads

A

difference in strike prices - net credit

49
Q

break even on call spreads

A

lower strike price + net premium

50
Q

credit spreads are profitable if:

A
  • difference in strike price narrows

- both options expire

51
Q

net credit =

A

difference in premiums has more money coming in than out.

selling more than buying

52
Q

net debit =

A

difference in premiums has more money going out than coming in.
(buying more than selling)

53
Q

max gain on debit spreads

A

strike prices difference - net debit

54
Q

max loss on credit spreads

A

net debit

-is the difference in premiums

55
Q

break even on put spreads

A

higher strike price - net premium

56
Q

debit spreads are profitable if:

A
  • difference in premiums widens

- both options are exercised

57
Q

which strike price is dominant in call spreads?

A

lower strike price is dominant

58
Q

which strike price is dominant in put spreads?

A

higher strike price is dominant

59
Q

what kind of spread?
b dec 50 call
s dec 45 call

A

45 dollars out, 50 dollar in = 5 dollar profit

credit, bearish call spread

60
Q

call spreads are bearish if..

A

buy higher call, sell lower call

61
Q

what kind of spread?
s dec 50 call
b dec 45 call

A

50 dollars in, 45 dollars out = 5 dollars out

debit, bullish call spread

62
Q

call spreads are bullish if..

A

sell higher call, buy lower call

63
Q

purpose of foreign currency options?

A

hedge change in value of foreign currencies versus US dollar

64
Q

cheat for importers and exporters of options

A

EPIC

  • exporters buy puts
  • importers buy calls
65
Q

tax rules for options when closing transactions

A

capital gain or loss when position is closed

66
Q

tax rules for options when option contract expires

A

capital gain or loss when position expires

-gain if short, loss if long

67
Q

tax rules for options when option contract is exercised

A

no gain or loss reported until stock position is closed

68
Q

OCC

A

options clearing corporation

-options regulatory governing body

69
Q

option disclosure statement

A

must be sent to customer at or before account approvel

70
Q

when must options accounts be approved and by who before trades are allowed?

A
  • must be approved before first trade date

- registered options principal must approve the account

71
Q

purpose of options agreement and what does it contain?

A

covers brokering firm

  • financial information
  • investment experience
  • disclosure statement understanding
72
Q

how many days does customer have to sign and return option agreement?

A

within 15 days after account approval

73
Q

when do option contracts settle?

A

t + 1 day

74
Q

what exchange do options trade on?

A

Chicago Board Options Exchange

75
Q

maximum number of contracts for equity positions?

A

250,000

76
Q

all advertising and sales literature must be approved by?

A

registered options principal

77
Q

describe advertising literature

A
  • audience unknown
  • must file with OCC 10 days before use
  • no strategy recommendations
78
Q

describe sales literature

A
  • audience known
  • no filing with OCC
  • may recommend strategies
79
Q

what are the 3 communication categories?

A
  • retail
  • correspondence
  • institutional
80
Q

what defines retail advertising?

A

25 or more of same material within 30 days

81
Q

what defines correspondence advertising?

A

25 or less of same material within 30 days

82
Q

what defines institutional advertising?

A

advertising to banks, etc.

series 7 take 2 (17 decks)

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