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65 Final Prep > Options & Trading > Flashcards

Options & Trading Flashcards

1
Q

Orders placed below the current market & filled as the market drops

A

OBLOSS Open Buy Limits Open Sell Stops

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2
Q

Orders placed higher than the current market

A

OSLOBS Open Sell Limits Open Buy Stops

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3
Q

A call option gives the owner

A

the right to buy the underlying security at a specific price for a specified time period

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4
Q

A “limit” order specifies that…

A

The order must be filled at that price or better

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5
Q

A stop order specifies…

A

that it must be filled at the first opportunity - so the execution price is unknown

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6
Q

Buy limit orders…

A

Must be filled at the limit price or lower

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7
Q

Buy stop orders…

A

are filled in rising markets;

allow the purchase at a price that is higher than the current market

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8
Q

Shorting is a strategy used when…

A

an investor anticipates the price of a security will fall in the short term

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9
Q

Alternative assets are typically characterized by…

A
  • Inefficient pricing
  • Providing potential abnormal returns & alpha returns
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10
Q

Third Market

A

Trading of exchange listed securities OTC

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11
Q

Sell limit orders…

A

allow the sale of a security at a pirce that is higher than current markets

(filled in rising markets)

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12
Q

Investors open margin accounts to…

A

Leverage their investment dollars

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13
Q

In an agency transaction, the firm trades with…

A

Other market makers

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14
Q

In a Principal transaction, the firm trades from its…

A

inventory account

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15
Q

A “not held” order is a market order that…

A

gives the trader price & time discretion during that trading day

(the trader is supposed to use their judgment to get the best price, but there is no garuntee as to the fill price)

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16
Q

Second Market

A

Trading of unlisted securities OTC

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17
Q

market makers must…

A

maintain inventories of different stocks in which they make a market

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18
Q

market makers quotes are published…

A

in mediums such as NASDAQ

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19
Q

Front running

A

placing a trade prior to entering a large institutional order that may move the market

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20
Q
A
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21
Q

A put writer will…

A

Lose money if the stock goes down, but the furthest it can drop is to 0

(Potential loss is limited)

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22
Q

The seller (writer) of a put…

A

is obligated to buy the underlying security at the strike price if the market falls

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23
Q

What information must be on an order ticket before it can be entered?

A
  • Execution price if known (if not a market order)
  • Size of the transaction
  • Customer account name & number
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24
Q

Simultaneous transaction

A

“riskless principal transaction”

a BD, upon receiving a customer order to buy, buys the security into the firm’s inventory & then immediately sells that security out of inventory to the customer with a mark-up

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25
Q

the buyer of a call has the right to…

A

buy stock at a fixed price in a rising market

  • the buyer has unlimited gain potential
  • bullish market strategy
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26
Q

The best way to protect a long stock position against a potential substantial loss is to…

A

purchase put options on that stock

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27
Q

A covered short is when…

A

a trder borrows the shares from a stock loan department; in return, the trader pays a borrow-rate during the time the short position is in place

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28
Q

short sale transactions are typical for…

A
  • treasury bonds
  • municipal bonds
  • common stock
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29
Q

buying a put is a…

A

bearish strategy with risk limited to the amount paid for the put

30
Q

writing naked puts risks only…

A

the difference between the strike price & 0, less any premium received

31
Q

buying a call would be an attractive strategy in a…

A

bull market with risk limited to calls paid

32
Q

writing naked calls provides…

A

unlimited liability & the most risk

33
Q

What type of an investment are index options?

A

speculative investment

34
Q

long sale

A

the sale of a security that is owned by a customer, where the customer will deliver that security to the broker on settlement date;

the customer receives the proceeds from the long sale of the securities

35
Q

nonsecurities derivatives include futures & forwards. among the differences; futures contracts..

A

are rarely exercised because they are closed out prior to the expiration date

36
Q

A short straddle is…

A

a short call & a short put on the same underlying stock with the same strike price and same expiration date

37
Q

Dark Pools

A
  • operated by larger BDs (ex. Goldman Sachs) & some independent companies (ex. Liquidnet)
  • allows institutions to buy/sell very large blocks (10,000 shares or greater) without displaying their orders in a display system such as Nasdaq
38
Q

A BD tells a customer that is wiling to buy a stock at $20 and is willing to sell that same stock at $21. This is an example of…

A

a bid-ask quote

39
Q

A margin account allows…

A

the customer to borrow money from the BD in order to buy securities

40
Q

What is the “inside market”?

A

the highest bid & lowest ask price on a security from all market makers

41
Q

A “block trade” refers to…

A

a common stock transaction involving at least 10,000 shares

42
Q

Forward Contract

A
  • A private and customizable agreement that settles at the end of the agreement
  • traded OTC
  • for assets
  • high counterparty risk
43
Q

Warrants are often attached to a bond issue to reduce the…

A

interest costs to the issuer

44
Q

The exercise price of stock rights are usually _____ the current market price of the underlying security at the tme of issue

A

below

45
Q

A margin account could never be opened for…

A
  • Retirement accounts
  • Coverdell ESAs
  • UTMA/UGMAs
46
Q

First Market

A

Trading of exchange listed securities on stock exchanges

47
Q

Both rights & warrants may trade in the secondary market & may have prices that include a __________ _____ value.

A

speculative time

48
Q

What is “the spread”?

A

the difference between the bid & ask quote

49
Q

A client of a BD who sold 200 shares of XYZ short stock…

A

is obligared to return the 200 shares borrowed

50
Q

What is a Warrant?

A

A derivative that gives the right, not the obligation to buy or sell a securiuty at a certain price before expiration

Usually used for equities

51
Q

Short Interest

A

The total level of uncovered short sales, reported twice a month by the exchanges

52
Q

Fourth Market

A

direct trading of securities between institutions on the INSTINET system

53
Q

A dealer is a…

A

market maker, who is a principal in a transaction, earning a mark-up or mark-down

54
Q

Futures Contract

A

Has standardized terms & is traded on an exchange, where prices are settled on a daily basis until the end of the contract.

  • a settlement can occur over a range of dates
  • have clearing houses that guarantee the transactions
  • available of stock exchange indexes, commodities, and currencies
  • frequently used by speculators who bet on direction of asset price movement

*Usually closed out prior to maturity

55
Q

The exercise price of warrants are usually _____ the current market price of the underlying security at time of issue.

A

above

56
Q

An employee is oferred a nonqualified stock option with an exercise price of $20/share. If the option is exercised when the current market value of the stock os $30, the employee…

A

is taxed on $10/share as if it were salary

57
Q

In the case of nonqualified stock options (NSOs), the difference between the exercise (strike) price & the current market value is…

A

considered salary to the employee

58
Q

In OTC transactions, for effecting an agency trade, only a __________ can be charged

A

commision

59
Q

Matched Orders

A

are an attempt to manipulate market prices

60
Q

Short sale

A

the sale of borrowed shares

61
Q

If a customer has a margin account at a BD, the customer could receive a…

A

margin, maintenance, house call

62
Q

Trading Ahead or “Pennying”

A
  • specific NYSE violation
  • a DMM buys the security from the seller into the DMMs inventory accoutn and sells it to the buyer of that inventory account at a penny higher price
63
Q

Arbitrage

A

Buying on one exchange and selling on another

64
Q

American Depository Receipts (ADR)

A

make trading in foreign securities easier in US markets for US investors

65
Q

Short sales are not permitted in..

A

cash accounts

66
Q

Margin Call

A

if a customer has a cash account at a BD, the customer could receieve a margin call.

  • Occurs when margin account runs low on fnds, usually because of a losing trade;
  • Is a demand for additional capital or secueities to bring a margin account up to the minimum maintenance margin
67
Q

Marginable Securities

A

securities paid for by a loan, facilitated thru a brokerage or other financial institution that lends the money for these trades

68
Q

The term ‘sale’ does NOT include..

A

a bona fide pledge

69
Q

Designated Market Makers

A
  • Cannot deal with the public
  • Cannot act as underwriters
  • Are wholesale members of the NYSE who deal only with other retail firms
  • Act as market makers & BDs
70
Q

Wash Trades

A

An investor creates the appearance of trading activity with no change in ownership

65 Final Prep (8 decks)

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