Options Account Opening Procedures, Taxation, and Trading Markets

Question 1

Julio bought a 75 call at 5 and later exercised the option. What is Julio’s cost basis?

Answer 1

75 + 5 = 80 (strike price plus the premium)

Question 2

Jean bought an 80 put at 7 and later exercised the contract. Jean would have sales proceeds of how much?

Answer 2

$8,000 - $700 = $7,300 or 73 (strike price minus the premium)

Question 3

Jim has owned BNB stock for 9 months and now buys a BNB put to hedge. Does the put purchase affect Jim’s holding period?

Answer 3

Yes, the put purchase terminates the stock’s holding period.

Question 4

Within a firm, who performs the supervisory functions as they pertain to options?

Answer 4

The Registered Options Principal (ROP)

Question 5

Clients must sign and return the options account agreement within _____ days.

Answer 5

Clients must sign and return the options account agreement within 15 days.

Question 6

If the OCC examines position limits on ABC, what contracts are added on the bullish side of the market?

Answer 6

ABC long calls and ABC short puts

Question 7

Only __________ transactions can be effected if a client does not sign and return the options account agreement.

Answer 7

Only closing transactions can be effected if a client does not sign and return the options account agreement.

Question 8

Broad-based index options trade until _______ p.m. ET.

Answer 8

Broad-based index options trade until 4:15 p.m. ET.

Question 9

Eric sold a 50 call at 6 and was later exercised against. Eric would have sales proceeds of how much?

Answer 9

$5,000 + $600 = $5,600 or 56 (strike price plus the premium)

Question 10

Will the number of option contracts held be adjusted for odd splits or stock dividends?

Answer 10

No. Odd splits and stock dividends increase the shares per contract and decrease the strike price.

Question 11

True or False: When adjusted for stock splits or stock dividends, an option’s overall contract value remains constant.

Answer 11

True

Question 12

What method does the OCC use when issuing an exercise notice to a BD?

Answer 12

Random selection

Question 13

Upon the exercise of an equity option, when does the transaction in the underlying security settle?

Answer 13

Three business days (T + 3)

Question 14

If Will has held ABC stock for 3 years and then buys a put on ABC stock, is the holding period affected?

Answer 14

No, once a long-term holding period is established, it is not destroyed by a put purchase.

Question 15

Glenn owns 1 ABC May 60 Call. If ABC announces a 2:1 split, how would Glenn’s position change?

Answer 15

Glenn now has 2 ABC May 30 Calls (100 shares each). The overall contract value must remain $6,000.

Question 16

Marty buys 1 ABC May 55 Call at 4. Later, if ABC is at 51 and the option expires, what is Marty’s gain or loss?

Answer 16

Marty has a loss of the $400 premium.

Question 17

What is the tax result for a LEAP that was purchased at 6 and two years later sold at 12?

Answer 17

A long-term capital gain of $600. Remember, a gain on an asset held greater than one year is long-term.

Question 18

Options-related retail communication must be filed with a regulator at least _____ calendar days prior to use.

Answer 18

Options-related retail communication must be filed with a regulator at least 10 calendar days prior to use.

Question 19

If the OCC examines position limits on STC, what contracts are added on the bearish side of the market?

Answer 19

STC long puts and STC short calls

Question 20

How can an even split be identified?

Answer 20

Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)

Question 21

For tax purposes, what is determined when a long call or short put is exercised and the investor acquires stock?

Answer 21

cost basis

Question 22

An investor who buys stock and on the same day buys a put (creating a hedge) has established a ________________.

Answer 22

An investor who buys stock and on the same day buys a put (creating a hedge) has established a married put.

Question 23

When may American-Style options be exercised?

Answer 23

On any business day up to the expiration date

Question 24

Mary bought 100 shares of GMG at 40 and on the same day buys 1 GMG Apr 40 put at 3. What is Mary’s basis in the stock?

Answer 24

40 + 3 = 43 (The cost of the stock plus the cost of the option)

Question 25

If asked to determine basis or sales proceeds on an exercised call, remember to ____________.

Answer 25

If asked to determine basis or sales proceeds on an exercised call, remember to CALL UP (strike price plus the premium).

Question 26

Emma sells 1 RST Oct 40 Put at 5. Later, if RST is at 43 and the option expires, what is Emma’s gain or loss?

Answer 26

Emma has a gain of the $500 premium.

Question 27

The maximum expiration for standard equity options is ____ months.

Answer 27

The maximum expiration for standard equity options is 9 months.

Question 28

The OCC will automatically exercise any option that is in-the-money by $____.

Answer 28

The OCC will automatically exercise any option that is in-the-money by $.01.

Question 29

When may European-Style options be exercised?

Answer 29

Only on the expiration date

Question 30

What is a LEAP?

Answer 30

A long-term equity option (maturity of up to 39 months)

Question 31

If a long put or short call is exercised and the investor delivers stock, he must determine his _________________.

Answer 31

If a long put or short call is exercised and the investor delivers stock, he must determine his sales proceeds.

Question 32

True or False: Options-related retail communication that is sent to existing clients must be filed with a regulator.

Answer 32

False. Retail communication sent to a person who has received the ODD (e.g. existing customers) need not be filed.

Question 33

The ___________________________ issues and guarantees option contracts.

Answer 33

The Options Clearing Corporation (OCC) issues and guarantees option contracts.

Question 34

Holden buys 1 STC 65 Call at 3. Later STC rises to 72 and the call is liquidated at 8.50. Is there a gain or loss?

Answer 34

Gain of $550 (determined by the difference between the $300 paid for the option and the $850 received on the sale).

Question 35

An investor owns 1 ABC May 60 Call. If ABC announces a 3:2 split, what are the terms of the investor’s contract now?

Answer 35

1 ABC May 40 Call (150 sh. contract). Shares increase to 150 (100 x 3/2) and strike price decreases to $40 ($60 x 2/3).

Question 36

By what time must equity options be exercised?

Answer 36

5:30 p.m. ET on the third Friday of the expiration month

Question 37

Narrow-based index options trade until _______ p.m. ET.

Answer 37

Narrow-based index options trade until 4:00 p.m. ET.

Question 38

At what time do equity options stop trading?

Answer 38

4:00 p.m. ET on the third Friday of the expiration month

Question 39

Mark sold an 80 put at 7 and was later exercised against. What is Mark’s cost basis?

Answer 39

80 - 7 = 73 (strike price minus the premium)

Question 40

If asked to determine basis or sales proceeds on an exercised put, remember to ____________.

Answer 40

If asked to determine basis or sales proceeds on an exercised put, remember to PUT DOWN (strike price minus the premium)

Question 41

The maximum expiration for LEAPS is _____ months.

Answer 41

The maximum expiration for LEAPS is 39 months.

Question 42

Once a firm is randomly selected by the OCC to receive the exercise notice, how will it in turn assign the notice?

Answer 42

Random selection, first-in / first-out (FIFO), or any other fair and equitable method.

Question 43

What is the correct order of the four steps to opening an options account?

Answer 43

1) Complete Options Account Agreement 2) ROP Approval 3) Trading 4) Customer signature within 15 days

Question 44

An investor owns 1 ABC May 60 Call. If ABC declares a 25% stock dividend, what is the investor’s new position?

Answer 44

1 ABC May 48 Call. The call is for 125 shares (100 x 25% = extra 25). Then, $6,000 (total value) ÷ 125 sh. = $48.

Question 45

If a married put is established and the option expires, what happens to the investor’s basis?

Answer 45

The basis (cost of the stock plus the cost of the option) will stay the same even after expiration.

Question 46

What are the specifics regarding the expiration of equity options?

Answer 46

They expire at 11:59 p.m. ET on the third Friday of the expiration month.

Question 47

True or False: Sophisticated clients with extensive experience need not be provided with an Option Disclosure Document.

Answer 47

False. All clients receive the disclosure document.

Question 48

What are some examples of odd splits?

Answer 48

3:2, 5:4, 12:5

Question 49

When do options trades settle between BD and the OCC?

Answer 49

Next business day (T + 1)