Q&A Flashcards
A member firm completes the execution of a large block transaction for a customer by purchasing a portion of the block for its inventory account. The member wishes to hedge its position by purchasing put contracts on that stock. Which statement is TRUE?
A
The firm is prohibited from buying the puts on that stock
B
The firm may buy the put contracts at the same time that the block order is executed
C
The firm may buy the put contracts after the block transaction is completed and reported
D
The firm may buy the put contracts at any time
C. “Front running” a customer is a prohibited practice. If a firm is executing a large block trade for a customer, in this case selling the shares for that customer, it cannot place itself in a position to profit from the block transaction. A large sale will tend to depress the price of the stock. If the firm were to buy puts in advance of the execution of the large sale, it would have a profit on the puts that was obtained illegally. The firm cannot position itself with options until it has completed the large block trade and the execution is reported on the Exchange Tape. Then, the firm may buy put options (in this case, as a hedge against a fall in value for the portion of the shares that it purchased for its own account).
Exercise limits on stock option contracts cover a time period of: A 5 business days B 10 business days C one calendar month D nine calendar months
A.
Exercise limits are applied to all exercises of contracts on the same side of the market in the same issuer over a 5 business day period.
Call options may be sold in which of the following accounts? I Special Cash Account II Special Subscription Account III Special Memorandum Account IV Margin Account
A IV only B I and IV only C I, II, III D I, II, III, IV
B. Covered call options may be sold against stock held long in a cash account; and covered call options may be sold against stock held in a margin account. Naked call options cannot be sold in a cash account since margin is required; they may only be sold in a margin account. Special Memorandum Accounts (“SMA”) represent unused borrowing in margin accounts and do not reflect any securities positions. Special Subscription Accounts no longer exist (except on this exam!).
True or False
The CBOE will halt trading in a specific option contract if two Floor Officials agree that trading should be halted.
True.
The length of the halt can be no more than 2 business days.
True or False
The length of the halt can be no more than 2 business days.
True
A customer buys 1 ABC Jan 60 Put @ $5 when the market price of ABC is $58. The put is exercised when the market price is $51. For tax purposes, the sale proceeds are: A $4,600 B $5,500 C $6,000 D $6,500
B.
When a put is exercised, a sale takes place. The holder is selling for 60 but paid 5 in premiums for a net sale price of 55 or $5,500 for the contract.
A registered representative wishes to give a seminar to a group of investors on the features and risks of buy/write strategies and options collars. The registered representative wants to advertise the seminar in the local newspaper. Which statement is TRUE?
A
The seminar text must be approved by the designated ROP in advance of use
B
The seminar text must be approved by the SRO prior to use
C
The seminar text must be approved by the designated ROP prior to use and the advertisement must be approved by both the designated ROP and the SRO prior to use
D
The seminar text and the advertisement must be approved by both the designated ROP and the SRO prior to use
D.
Seminar texts are defined as “sales literature,” which must be approved by the designated ROP (Series 4 - Main Office Compliance ROP) prior to use (as must advertising and independently prepared reprints). In addition, all options advertising, sales literature and independently prepared reprints that are not accompanied or proceeded by delivery of the ODD (Options Disclosure Document) must be filed with the SRO 10 days prior to use and receive approval from the SRO prior to use.
Which statement is TRUE about communications that are not preceded by delivery of the Options Disclosure Document?
A
Only options advertising must be filed with the SRO 10 days in advance of use
B
Only options advertising and sales literature must be filed with the SRO 10 days in advance of use
C
Only options advertising and independently prepared reprints must be filed with the SRO 10 days in advance of use
D
Only options advertising, sales literature and independently prepared reprints must be filed with the SRO 10 days in advance of use
D.
Each SRO (Self-Regulatory Organization) such as the CBOE requires pre-filing and SRO approval of options advertising, sales literature, and independently prepared reprints. Note that the designated ROP (Registered Options Principal) is required to approve all 3 of these prior to use. The BOM cannot approve these communications. The filing rules only apply to communications that have NOT been accompanied or preceded by delivery of the Options Disclosure Document. If the recipient has already received the ODD, there is no filing with the SRO, but Designated ROP approval is still required.
Blank form options worksheets must be approved in advance by the: A Branch Office Manager B Designated Registered Options Principal C Chicago Board Options Exchange D Options Clearing Corp
B.
The blank form standard options worksheet must be approved in advance by the designated ROP (the main office supervisory ROP). Once the form is approved, it is available for use in branch offices to illustrate potential returns that customers can achieve from various options strategies. The registered representative fills in the form to illustrate a given scenario. This completed form must be approved by the Branch Office Manager (Registered Options Principal) prior to use.
The maximum number of PHLX EURO currency options contracts that an individual can take on 1 side of the market is: A 200 contracts B 10,000 contracts C 20,000 contracts D 200,000 contracts
D.
The position limit on PHLX traded currency option contracts is 200,000 contracts on a single currency on 1 side of the market. The “up” side of the market is long calls and short puts; the “down” side of the market is long puts and short calls.
The margin requirement to sell a T-Bond option is based upon the:
A
market value of the underlying instrument
B
face value of the underlying instrument
C
coupon rate of the underlying instrument
D
yield to maturity of the underlying instrument
B.
Margins to sell Treasury options (when they existed - they are discontinued products, but the basis for margin must still be known) are based on the face value (not the market value) of the underlying instrument. All other options margins are based on market value, so be careful with this one!
True or False
Under SEC and CBOE rules, issuers are prohibited from selling calls against their own stock.
True
Which CBOE FLEX options are available? I Equity FLEX Options II Index FLEX Options III Interest Rate FLEX Options IV VIX FLEX Options
I and II only
CBOE FLEX (customizable option contracts mainly for institutional use, since the minimum size trade is $1,000,000) options are available on equities and stock indexes. They are not offered on interest rates or the VIX (volatility index).I and II only
The OCC does all of the following EXCEPT: A maintain an orderly trading market in options B issue options contracts C assign options exercise notices D guarantee viability of options contracts
A.
The Options Clearing Corporation is the issuer and guarantor of listed options contracts. The OCC keeps the record of all long and short positions and changes that occur in these positions due to trading or exercise. When the OCC receives an exercise notice, it picks a writer to be assigned the contract on a random basis. Trading of the contracts occurs on exchanges - there is no trading at the OCC!
True or False
The PHLX defines a “block” option trade in a foreign currency option as a trade of 100 contracts or more.
False
The PHLX defines a “block” option trade in a foreign currency option as a trade of 1,000 contracts or more.
