Options & Trading Flashcards
Orders placed below the current market & filled as the market drops
OBLOSS Open Buy Limits Open Sell Stops
Orders placed higher than the current market
OSLOBS Open Sell Limits Open Buy Stops
A call option gives the owner
the right to buy the underlying security at a specific price for a specified time period
A “limit” order specifies that…
The order must be filled at that price or better
A stop order specifies…
that it must be filled at the first opportunity - so the execution price is unknown
Buy limit orders…
Must be filled at the limit price or lower
Buy stop orders…
are filled in rising markets;
allow the purchase at a price that is higher than the current market
Shorting is a strategy used when…
an investor anticipates the price of a security will fall in the short term
Alternative assets are typically characterized by…
- Inefficient pricing
- Providing potential abnormal returns & alpha returns
Third Market
Trading of exchange listed securities OTC
Sell limit orders…
allow the sale of a security at a pirce that is higher than current markets
(filled in rising markets)
Investors open margin accounts to…
Leverage their investment dollars
In an agency transaction, the firm trades with…
Other market makers
In a Principal transaction, the firm trades from its…
inventory account
A “not held” order is a market order that…
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)
Second Market
Trading of unlisted securities OTC
market makers must…
maintain inventories of different stocks in which they make a market
market makers quotes are published…
in mediums such as NASDAQ
Front running
placing a trade prior to entering a large institutional order that may move the market
A put writer will…
Lose money if the stock goes down, but the furthest it can drop is to 0
(Potential loss is limited)
The seller (writer) of a put…
is obligated to buy the underlying security at the strike price if the market falls
What information must be on an order ticket before it can be entered?
- Execution price if known (if not a market order)
- Size of the transaction
- Customer account name & number
Simultaneous transaction
“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
the buyer of a call has the right to…
buy stock at a fixed price in a rising market
- the buyer has unlimited gain potential
- bullish market strategy
The best way to protect a long stock position against a potential substantial loss is to…
purchase put options on that stock
A covered short is when…
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
short sale transactions are typical for…
- treasury bonds
- municipal bonds
- common stock
buying a put is a…
bearish strategy with risk limited to the amount paid for the put
writing naked puts risks only…
the difference between the strike price & 0, less any premium received
buying a call would be an attractive strategy in a…
bull market with risk limited to calls paid
writing naked calls provides…
unlimited liability & the most risk
What type of an investment are index options?
speculative investment
long sale
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
nonsecurities derivatives include futures & forwards. among the differences; futures contracts..
are rarely exercised because they are closed out prior to the expiration date
A short straddle is…
a short call & a short put on the same underlying stock with the same strike price and same expiration date
Dark Pools
- 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
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 bid-ask quote
A margin account allows…
the customer to borrow money from the BD in order to buy securities
What is the “inside market”?
the highest bid & lowest ask price on a security from all market makers
A “block trade” refers to…
a common stock transaction involving at least 10,000 shares
Forward Contract
- A private and customizable agreement that settles at the end of the agreement
- traded OTC
- for assets
- high counterparty risk
Warrants are often attached to a bond issue to reduce the…
interest costs to the issuer
The exercise price of stock rights are usually _____ the current market price of the underlying security at the tme of issue
below
A margin account could never be opened for…
- Retirement accounts
- Coverdell ESAs
- UTMA/UGMAs
First Market
Trading of exchange listed securities on stock exchanges
Both rights & warrants may trade in the secondary market & may have prices that include a __________ _____ value.
speculative time
What is “the spread”?
the difference between the bid & ask quote
A client of a BD who sold 200 shares of XYZ short stock…
is obligared to return the 200 shares borrowed
What is a Warrant?
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
Short Interest
The total level of uncovered short sales, reported twice a month by the exchanges
Fourth Market
direct trading of securities between institutions on the INSTINET system
A dealer is a…
market maker, who is a principal in a transaction, earning a mark-up or mark-down
Futures Contract
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
The exercise price of warrants are usually _____ the current market price of the underlying security at time of issue.
above
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…
is taxed on $10/share as if it were salary
In the case of nonqualified stock options (NSOs), the difference between the exercise (strike) price & the current market value is…
considered salary to the employee
In OTC transactions, for effecting an agency trade, only a __________ can be charged
commision
Matched Orders
are an attempt to manipulate market prices
Short sale
the sale of borrowed shares
If a customer has a margin account at a BD, the customer could receive a…
margin, maintenance, house call
Trading Ahead or “Pennying”
- 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
Arbitrage
Buying on one exchange and selling on another
American Depository Receipts (ADR)
make trading in foreign securities easier in US markets for US investors
Short sales are not permitted in..
cash accounts
Margin Call
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
Marginable Securities
securities paid for by a loan, facilitated thru a brokerage or other financial institution that lends the money for these trades
The term ‘sale’ does NOT include..
a bona fide pledge
Designated Market Makers
- 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
Wash Trades
An investor creates the appearance of trading activity with no change in ownership
