Series 9 Exam Flashcards
Each new option customer must receive a copy of the option disclosure document when?
at or before the account is APPROVED
If the option disclosure is revised, all options customers must receive a current document by when?
the date that the next option transaction conformation is delivered.
When is a customer required to sign the new account form?
only if it is for a MARGIN ACCOUNT
Who must always sign the new account form?
A Series 9/10 or the ROP
If the Branch Office Manager is not an ROP or a Limited Principal - General Securities Sales Supervisor (Series 9/10), a new account must be submitted for approval or disapproval in what timeframe to the designated ROP or sales supervisor (Series 9/10)?
10 Business Days
If the signed option agreement is not returned within (1) what timeframe of the account approval, the firm can permit (2) what kind of transactions only?
(1) Timeframe
(2) Transaction Type
(1) 15 Calendar Days
(2) Closing Transactions Only
The Special Statement for Uncovered Options Writers must be delivered when?
before the initial sale
An ROP designated to review discretionary accounts who is not exercising the discretionary authority must approve and initial each discretionary order when(1)?
(2) Also, how must each order ticket be marked?
(1) On the day entered
(2)
An ROP designated to review discretionary accounts who is not exercising the discretionary authority must approve and initial each discretionary order when(1)?
(2) Also, how must each order ticket be marked?
(1) On the day entered
(2) Discretionary
Where must the background and financial information (Option New Account Form) be kept?
Both Branch and Supervisory Office
Where must Customer Account Statements be kept and for 6 months?
Both Branch and Supervisory Office
Order entry blotters (aka order entry daybooks) must be kept for how long?
6 years
How long do you keep customer account documentation (new account form, margin agreement, etc)
6 years
Original books of record are kept how long?
Lifetime
Suspicious Activity Reports are kept how long?
5 years
Written customer complaints are kept how long?
4 years
Written customer communications are kept how long?
3 years
Error Reports, error records, trade correction reports are kept how long?
3 years
Customer order tickets are kept how long?
3 years
Customer order confirmations are kept how long?
3 years
Exception reports are kept how long?
18 months
SIPC Coverage and options coverage
1) Futures, commodities, currencies
2) equity options
1) Not Covered
2) Covered
SIPC Coverage max
$500,000 per account
No more than $250,000 cash
A Limited Principal - General Securities Sales Supervisor’s role in options communications?
May not approve
What must a person receive before delivering anyone material relating to options?
The OCC Disclosure Document
Primary advantage of using a collar is what?
Max the gain in a long security while limiting the price decline
This strategy is used to lock in a price and roll the position into another tax year
collar
Regulation T for equities
1) Initial Margin
2) Maintenance Margin
1) 50%
2) 25%
Initial Margin Requirement for Uncovered Stock Options
1) % Current Premium
2) % of the underlying security’s current market value (CMV)
3) - Amount out of the money
4) = Margin Requirement
1) 100%
2) 20%
Short 1 ABC Jan 50 Call @3 (CMV = 48)
What is the Margin Requirement
1) 100% Current Premium = $300
2) 20% of the underlying security’s current market value (CMV) = $960
3) - Amount out of the money = $200
4) = Margin Requirement = $1,060
Of the three suitability standards for customers which one is not correct?
1) Reasonable-Basis Suitability
2) Margin Suitability
3) Customer-Specific Suitability
4) Quantitative Suitability
2) Margin Suitability
Qualified Contingency Cross
Minimum # of contracts
1,000 or more
Qualified Contingency Cross
Type of trade & needs of contra sides
Multi-legged
Contra sides must match
Qualified Contingency Cross
Pricing
at or better than the NBBO
Qualified Contingency Cross
What is it
a block trade of options that are multi-legged
Penny Cabinet Order.
A “penny cabinet” order is a limit order with a price of
$0.01.
Penny Cabinet Order.
Penny cabinet orders are not available in classes with a minimum increment of
$0.01.
Sub-Penny Cabinet Order
A “sub-penny cabinet” order is a limit order with a price of
less than $0.01 per contract.
Sub-Penny Cabinet Order
Bids and offers for opening transactions are only permitted to accommodate
closing transactions.
Penny Cabinet Order.
Offerings higher than a penny
Not Permitted
How often are ROPs supposed to review Discretionary Accounts
“Frequently”
Minimum required to open an options account
There is no minimum
Minimum required to open an options account
There is no minimum
BOM requirement to be qualified as a Limited Principal-General Securities Sales Supervisor (Series 9/10)
Not always required
BOM requirement to be qualified as a Limited Principal-General Securities Sales Supervisor (Series 9/10)
Not always required
Fiduciary Account
1) Requires what?
2) Exception to that requirement?
1) Acceptable Court Document certifying individual’s appointment and authority
2) UGMA / UTMA custodial accounts
Speculative Transactions in a Fiduciary Account
Generally Prohibited
Margin Account in a Fiduciary Account
Permitted if outlined in legal documents
Only account allowed for uncovered options writing
Margin Account
Before the Options account is opened the customer must receive what
Latest OCC Disclosure Document
What date must be on the New account form for an Options Account
Date the OCC Disclosure Document was delivered to the client
Who may approve accounts for uncovered calls or puts
Only the ROP
Day Trading Strategies
Risk Disclosure Statement delivery
Before Opening Account
Amended options account form sent to customer due to a change in their financial status requires what
1) Approval
2) Return of form
3) Consequence if not returned
1) MAY require new ROP approval
2) 15 days
3) Closing transactions only
Options Positions due to expire within what timeframe are exempt from the requirement to freeze an account due to an ACAT request
7 business days
When must a new options customer who has not yet traded options receive the Options Clearing Corporation’s current disclosure document?
at or before ROP Approval
When must the Special Statement for Uncovered Options Writers be delivered
Before initial uncovered short option trade
The Firm’s Special Statement for Uncovered Options Writers form requires what before first use?
FINRA Approval
If a discretionary account uses a specific trading strategy what must be done?
The customer must receive a written explanation of the strategy
A customer who has both a cash and margin account
1) is considered to have how many accounts?
2) Guaranteed Account
1) 1 Account
2) customer written guarantee access to BD to use in
Using account guarantees in a day trading account for margin requirements.
Prohibited
To be eligible for portfolio margining, an investor must be approved for what?
Uncovered Writing
Anti-Money Laundering Testing Requirement
1) Internal
2) Independant
1) Annually
2) every 2 years
Currency Transaction Report
1) Dollar Threshold
2) Form Used
3) Filing Timeline
4) Oversight Agencies
1) $10,000
2) Form 112
3) 15 days
4) Fed Reserve & Dept of Treasury
When illicit funds enter the financial system through wire transfers, deposits, or other transactions
Placement Stage
Involves the movement of funds designed to separate the illegal money from its source. It obscures the audit trail and the connection to its origin.
Layering Stage
When illegal funds are commingled with legitimate funds and returned to the criminal from what appear to be legitimate sources.
Integration
What would trigger a firm to recheck the OFAC List?
An existing customer trying to open a new options account.
Firm’s requirements after checking a customer on the OFAC list
Print out report, time stamp and keep with account documents
Timeframe for firm to verify customer’s identity under the USA Patriot Act
“within a reasonable time”
Suspicious Activity Reports (SAR)
1) Dollar Threshold
2) Form Used
3) Filing Timeline
4) Oversight Agencies
1) $5,000
2) Form 111
3) 30 days
4) Financial Crimes Enforcement Network (FinCEN)
USA Patriot Act
1) Wires exceeding what amount require retention & reporting?
2) Form Used?
1) $3,000
2) Form 111
Customer Verification
1) Sent to customer to verify information NLT when?
2) Response from Customer Required?
1) within 15 days after account APPROVAL
2) Not required unless change made
Requirement when a Branch Office Manager is not a Registered Options Principal or a Limited Principal-General Securities Sales Supervisor.
A ROP or Limite Principal-General Securities Sales Supervisor must approve/disapprove in 10 days
ROP delegation of authority to a BOM for the supervision and control of options business conducted at a branch requires?
BOM has passed Series 9/10 Exams
Designation of the Registered Options Principal (ROP) and Registered Options Securities Futures Principal (ROSFP)
1) Number Required
2) Exam Passed
1) Can be same person or 2 different people
2) Series 4
A discretionary order to sell uncovered options must be approved when
on the day entered
An ROP designated to review discretionary accounts who is not exercising the discretionary authority must approve and initial each discretionary order on the day entered. Each order ticket must be marked discretionary.
Which of the following statements about determining suitability for institutional accounts is not true?
A)
A member should have a reasonable basis to believe that the institutional customer can utilize their own investment strategies concerning sophisticated transactions.
B)
A member must fulfill the customer-specific suitability obligation for an institutional account.
C)
A member must affirmatively indicate that it is exercising independent judgment in evaluating the recommendations.
D)
A member should have a reasonable basis to believe that the institutional customer is capable of evaluating investment risks.
A)
A member should have a reasonable basis to believe that the institutional customer can utilize their own investment strategies concerning sophisticated transactions.
Explanation
A member or associated person (AP) must fulfill the customer-specific suitability obligation for an institutional account. The member or AP must have a reasonable basis to believe that the institutional customer is capable of independently evaluating investment risks and investment strategies concerning particular transactions. Also, the institutional customer must affirmatively indicate that it is exercising independent judgment in evaluating the member’s or AP’s recommendations.
LO 1.b
Which of the following statements regarding discretionary accounts is false?
A)
They must be opened and approved only by a Registered Options Principal (ROP).
B)
They require a written power of attorney before any trades take place.
C)
They can be opened by a branch office manager (BOM) but must be approved by a Registered Options Principal (ROP) within 10 days.
D)
A discretionary account does not automatically extend from an equity account to an options account.
A)
They must be opened and approved only by a Registered Options Principal (ROP).
Explanation
A BOM, General Securities Sales Supervisor (Series 9/10), or an ROP are permitted to open and approve discretionary accounts. A discretionary options account requires the customer to complete a written power of attorney before any discretionary trades can be transacted in the account. Discretionary trading authorization for an equity account does not automatically extend to an options account. A separate discretionary authorization form is required for options transactions. While a discretionary options account can be opened (initially approved) by a BOM so that an initial transaction can be executed, the account must ultimately be approved by an ROP within 10 business days.
One way that long-term equity anticipation securities (LEAPS) differ from standard options is that they
A)
trade at lower premiums.
B)
have more risk.
C)
will have more time value in their premium.
D)
are for speculative investors.
C)
will have more time value in their premium.
LEAPS normally trade at higher premiums because there is a better chance they will be in-the-money at some time before expiration—that is, they have more time value (up to three years). The risk and reward characteristics of LEAPS contracts are similar to standard nine-month options. Long-term options are available on a limited number of companies.
LO 1.d
Under FINRA rules, copies of completed options worksheets must be retained for
A)
six years.
B)
three years.
C)
five years.
D)
one year.
B)
three years.
Explanation
Copies of worksheets like other options communications with the public must be retained for three years.
A way for an investor to purchase a security below the current trading price would be to
A)
write covered closing calls.
B)
write covered closing puts.
C)
write covered opening calls.
D)
write covered opening puts.
D)
write covered opening puts.
Explanation
The time value of a covered opening put writing could enable the investor to purchase stock below the current trading price, if her short puts were assigned. The premium she received from the puts would be subtracted from her strike price, or if the stock rose and she never purchased the stock, she would keep the premium. The transaction would be an opening position.
A confirmation regarding a trade in a listed option must include which of the following pieces of information?
I. The first date the contract may be exercised
II. Whether the transaction is an opening or a closing transaction
III. The exercise price of the contract
IV. The aggregate exercise price
II. Whether the transaction is an opening or a closing transaction
III. The exercise price of the contract
Explanation
Confirmations must state whether the trade was an opening or a closing transaction and the exercise price. The aggregate exercise price is not required. The contract can be exercised immediately—even on the trade date.
Member firms must establish minimum net equity requirements for initial approval and maintenance of certain options accounts. Which of the following is true?
A)
The net equity requirement applies only to accounts that will be approved for spreads.
B)
The net equity requirement applies to the opening of all options accounts.
C)
The net equity requirement applies only to accounts that will be approved for uncovered contracts.
D)
The numeric criteria for the required net equity is standardized by FINRA for all firms.
C)
The net equity requirement applies only to accounts that will be approved for uncovered contracts.
Explanation
There is no minimum net equity requirement to open an options account unless the account is to be approved for uncovered positions. When required, there is no standard numerical number (amount) for minimum net equity, and therefore, it can differ from firm to firm but must adhere to all acceptable standards, in terms of suitability.
LO 1.d
Other than the trade blotter’s customary information (e.g., trade date, account identification, transaction information, and executed price), the branch office manager would not be able to recognize
A)
that certain accounts have considerably different execution prices for the same security.
B)
securities on the watch or restricted trading list.
C)
the portfolio manager showing favoritism to select clients.
D)
underlying securities that are about to expire worthless.
D)
underlying securities that are about to expire worthless.
Explanation
It would be easy to spot any securities on a restricted or watched list. If a portfolio manager were to show favoritism to select clients, you would see the trading in their accounts first over other accounts. Also, the blotter would show certain accounts continually have better execution prices than other accounts. All of these would be red flags. Options can expire worthless, not the underlying security. Trade blotters must be kept for six years.
LO 1.f
A customer of the firm wants to open up more than one options account at a brokerage firm without moving assets to fund the account. This type of account would be
A)
a guardian account.
B)
a discretionary account.
C)
an institutional account.
D)
a guaranteed account.
D)
a guaranteed account.
Explanation
If a customer wishes to open more than one individual account with a broker-dealer, the representative must obtain from the customer a statement attesting that no one else has any interest in the second and subsequent accounts and that each account unreservedly guarantees the others—a guaranteed account. In a discretionary account, the principal (beneficial owner) has given the registered representative authority to enter transactions at the representative’s discretion. The registered representative may, if directed by the customer, use discretion about price (buy or sell), time, and choice of securities (bought or sold). An n institutional account is a bank, savings and loan company, or an insurance company. A guardian is a fiduciary who manages an account for a minor or someone who is incapable.
LO 1.a
Options Exchange cutoff time for receiving an exercise notice
5:30 ET
Common Objective of Call Writers
Bearish
Income
Lock in sale price
Common Objective of Put Buyers
Bearish
Protect current market price from declining
Speculating on decrease to sell at higher price
Common Object of Put Writers
Bullish
Buying stock below its current price
Hedging Strategy Purpose
Long Stock / Long Put
Put protecting long stock position against decline
Hedging Strategy Purpose
Short Stock / Long Call
Call is protecting short position against rising market
Income Strategy
Long Stock / Short Call
Covered Call
Income Strategy
Short Stock / Short Put
Puts sold against the short position
Option Strategy allowed in UGMA/UTMA
Covered Call Writing
Married Put
Simultaneously buying the stock and put together
Married Put Cost Basis
Price of stock + Price of Put combined
Synthetic Put
Short Stock & Long Calls
Covered Put
Short Stock & Short Put
Best hedge for a short put
buy another put
The Collar
1) Positions
2) Purpose
1) Long Stock
Long Put
Short Call
2) Protects long-term gain and potentially roll the position into another tax year
Cashless Collar
One where Premium received on Short Call equals Premium paid for Long Put
(collar is long stock, long put, short call combined)
Income strategies involve
A)
selling calls or buying puts.
B)
buying calls or buying puts.
C)
buying calls or selling puts.
D)
selling calls or selling puts.
D)
selling calls or selling puts.
Explanation
Income strategies would involve selling calls or selling puts, or both. Selling the options against the stock position (either long stock or short stock) would provide income or credit to the account.
Which of the following simulates a long put?
A)
Short stock/long call
B)
Long stock/long put
C)
Long stock/short call
D)
Short stock/short put
A)
Short stock/long call
The characteristics of a long put include the following: maximum loss equals premium paid, and maximum gain occurs if the stock becomes worthless (strike price − premium). For example, buy 1 ABC Jan 40 put at 3: maximum loss is $300 and maximum gain is $3,700. Compare this to short stock/long call: short 100 shares at 40, long 1 Jan 40 call at 3. If the stock goes up against the customer, maximum loss is $300. If the stock becomes worthless, there is a $4,000 gain on the short sale less the $300 premium paid.
LO 2.c
An investor sells short 100 XYZ stock at 50. If he thinks that the stock is unlikely to move much in the near future, he may wish to increase the return on the short sale by going
A)
short 1 XYZ 50 put at 4.
B)
short 1 XYZ 50 call at 5.
C)
long 1 XYZ 55 put at 4.
D)
long 1 XYZ 50 call at 5.
A)
short 1 XYZ 50 put at 4.
To increase returns, the investor should sell a put option. It is unlikely that the investor will have to purchase the stock at the strike price because the stock’s price is not likely to fall.
LO 2.c
Options Positions allowed in a Cash Account
Buying Options or Selling Covered Calls only
What does a retail customer need to receive before a member firm opens a margin account?
The customer has received the Firm’s Margin Disclosure Statement
Option Premium required to be deposited in a Margin Account
1) Normal
2) Exception
1) 100%
2) LEAPS with >9 months = 75% required
Regulation T deposit for LEAPS Option > 9 months
75%
Minimum Margin Allowed
$2,000 or 100% of purchase price (whatever is less)
When must a buyer make payment for an option purchase?
NLT 1 BD after the Trade Date
Regulation T Margin Requirement for Covered Options in a margin account when long the stock
1) Amount
2) Action Required to meet margin call
1) Zero - No Reg T Margin Requirement
2) Deposits into the account
- the stock
- presents an escrow agreement (receipt) for the underlying stock
- Convertible security
- Long Call in same stock with same or later exp date and same or lower exercise price
Depositing Cash to cover a short call in a margin account
Never covers a short call, Exercise of the call requires delivery of the stock, not cash.
Regulation T Margin Requirement for Covered Options in a margin account when NOT long the stock
1) Amount
50% of the stock purchase price MINUS the premium for the call sold
Regulation T Margin Requirement for Covered Options in a cash account when NOT long the stock
1) Amount
100% of the stock purchase price MINUS the premium for the call sold
Frozen Account
1) Payment Timeline Short Sales
2) Payment Timeline Long Sales
1) T+3
2) T+5
Frozen Account timeline to remain frozen
90 days
Frozen Account allowable activities
still trade as long as funds or eligible margin securities are in account before trades
Covered Puts in a Margin Account
Avoidance of option margin requirements
Deposit
- Cash equal to exercise price of the put
- Bank Guarantee with funds available to cover
- Short Sale of underlying stock
- Purchase of put in same stock at same or higher Strike Price
If a short put is covered, there is no Reg T requirement for the option if the customer does what to meet the Reg T requirement…
deposit 50% of the short sale price
Crediting a margin account with money received from selling an option
allowed
Spreads
Long Call / Short Call
Long Put / Short Put
Credit Spread
One where investor ends up with positive cash flow between the two positions
Debit Spread
One where investor ends up with negative cash flow between the two positions
Maintenance Requirement for a Credit Spread
Buy 1 ALF Sep 30 Call @ 2
Sell 1 ALF Sep 25 Call @ 4
Difference between the Strike Prices MINUS call premiums
30-25 = 5
-2+4 = 2
$300
Also equals the MAX POTENTIAL LOSS
Maintenance Requirement for a Debit Spread
Buy 1 ALF Sep 30 Call @ 4
Sell 1 ALF Sep 25 Call @ 2
Difference between the call premiums
-4+2 = -2
$200
Also equals the MAX POTENTIAL LOSS
Margin Requirement for a Long Straddle
100% of combined premiums paid only
Margin Requirement for Short Straddle
Adding greater of short put or short call requirement to the proceeds of the Premiums on either side
Customer Portfolio Margining
1) Customers of firms with real-time intraday monitoring systems
2) Customers of firms without real-time intraday monitoring systems
3) Prime Broker Customers
1) $100,000
2) $150,000
3) $500,000
Customer Portfolio Margining
Customers must maintain what amount?
$5M
Customer Portfolio Margining
Margin Maintenance Calls must be met in what timeline vs conventional margin accounts
3BDs for Portfolio Margining
5BDs for Conventional
Time value, Intrinsic Value & Breakeven of a put in the following position
Writes 1 ABC Apr 60 put @ 5
ABC trading at 58
Time Value = 3
Intrinsic Value = 2
Breakeven = 55
Which Securities are Marginable
NMS Listed Securities
&
OTC Securities on the Fed Reserve’s Marginable Securities List
INITIAL Margin Requirement for Uncovered Equity Options
Short 1 ABC Jan 50 call @3 (CMV = 48)
100% of Current Option Premium $300
+20% of CMV $4,800 x 20% = $960
- Out of the Money $200
= Margin Requirement $1,060
MINIMUM Margin Requirements for Uncovered Stock Options
Short 1 ABC Jan 50 call @3 (CMV = 48)
100% of Current Option Premium $300
+10% of CMV (FOR CALLS or PUTS) $4,800 x 10% = $480
= Minimum Margin Requirement $780
Minimum Margin Requirements for Uncovered Stock Options is a concern only when?
When the option is out of the money
Margin Requirement when dealing with an out-of-the-money option
GREATER of INITIAL Margin Reqt or MINIMUM Margin Reqt
Buying power for Pattern Day Trader
4 times Maint. Margin Excess
Using Account Guarantees in a Day Trading Account
Prohibitted
A writer of an XYZ 45 put is considered covered in which of the following positions?
A)
Long XYZ 50 put
B)
Long XYZ 40 put
C)
Long XYZ common stock
D)
Short XYZ 45 call
A)
Long XYZ 50 put
Explanation
Being long a put with the same or higher strike price—and with the same or later expiration—covers the risk of writing a put with a lower strike price.
A writer of an XYZ 45 put is considered covered in which of the following positions?
A)
Long XYZ 50 put
B)
Long XYZ 40 put
C)
Long XYZ common stock
D)
Short XYZ 45 call
A)
Long XYZ 50 put
Explanation
Being long a put with the same or higher strike price—and with the same or later expiration—covers the risk of writing a put with a lower strike price.
In an existing margin account with no special memorandum account, a customer buys 100 DCF at 78 and writes 1 DCF Aug 80 call at 2.50. The Regulation T margin requirement is
A)
$5,730.
B)
$4,150.
C)
$5,530.
D)
$3,900.
D)
$3,900.
Explanation
The initial margin requirement for stock is 50% of the market value (50% × $7,800 = $3,900). There is no margin requirement for the option because the call is covered by the long stock position.
LO 3.a
Which of the following option strategies may be effected in a cash account by an investor who has no previous position in XYZ?
A)
Short 1 XYZ 30 call
B)
Long 1 XYZ 30 call at 4 and short 1 XYZ 25 call at 5
C)
Short 1 XYZ 30 call at 3 and short 1 XYZ 30 put at 2
D)
Long 1 XYZ 30 call and long 1 XYZ 30 put
D)
Long 1 XYZ 30 call and long 1 XYZ 30 put
Explanation
In a cash account, an investor can purchase options. An investor can also write calls against stock held in the account. In addition, the customer could also write puts if he is covered by cash.
LO 3.a
A customer sells short 100 shares of XYZ at 70 and writes an XYZ May 70 put for 3.50. The customer must deposit
A)
$6,650.
B)
$3,150.
C)
$7,000.
D)
$3,500.
B) $3,150
Explanation
The requirement of the short stock position is 50% or $3,500. The requirement on covered puts is zero. To determine the margin deposit, the premiums collected ($350) are subtracted from the required margin ($3,500 − $350 = $3,150).
A customer writes a put spread. Which of the following are true statements? (Pick 2)
I. The margin requirement is the difference between the two strike prices.
II. The margin requirement is the net premium received (credit).
III. The margin deposit is equal to the maximum gain potential of the position.
IV. The margin deposit is equal to the maximum loss potential of the position.
I. The margin requirement is the difference between the two strike prices.
IV. The margin deposit is equal to the maximum loss potential of the position.
Explanation
The margin requirement on a credit spread is the difference between the two strike prices. The margin deposit that must be made is the margin requirement less the net premiums received. This deposit amount is equal to the maximum loss potential of the position.
LO 3.a
A customer with no previous position in XYZ sells short 100 XYZ shares at 58. Later in the day, the customer buys 1 XYZ Jul 60 call at 4.50. The total deposit requirement is
A)
$2,900.
B)
$3,350.
C)
$4,510.
D)
$2,945.
B) $3,350
Explanation
The customer must deposit 50% of the short market value (50% × $5,800 = $2,900) and 100% of the option premium ($450). Therefore, $2,900 + $450 = $3,350.
The initial margin requirement for an out-of-the-money option is
A)
100% of the CMV of the premium + 20% of the CMV – any out-of-the-money difference.
B)
100% of the CMV of the premium + 10% of the CMV of the stock – any out-of-the-money difference.
C)
100% of the CMV of the premium + 10% of the CMV of the stock.
D)
the greater of the initial or minimum margin requirement.
D)
the greater of the initial or minimum margin requirement.
Explanation
When dealing with an out-of-the-money option, the requirement is the greater of the initial or minimum margin requirement.
LO 3.c
Your customer established a new position by writing a covered call in a margin account. The requirement for the position is
A)
10% of the market value of the underlying security plus an amount equal to the current market value of the option premium.
B)
an amount equal to the current market value of the option premium.
C)
50% of the stock purchase price for both the long stock and the short call.
D)
20% of the market value of the underlying security, less any amount the option is out of the money plus an amount equal to the current market value of the option premium.
C)
50% of the stock purchase price for both the long stock and the short call.
Explanation
If a short call is covered, there is no Regulation T margin requirement for the option. The customer must deposit 50% of the stock purchase price to meet the Regulation T requirement for both the long stock and the short call. The other items are for an uncovered call.
LO 3.a
A customer buys 100 shares of ABC at $30 per share and sells short 200 XYZ at $50 per share on the same day in a margin account. The customer then writes 1 ABC Oct 30 call at 5 and 2 XYZ Dec 50 puts at 6. What is the Regulation T requirement for all these transactions?
A)
$1,700
B)
$6,500
C)
$7,350
D)
$4,800
B) $6,500
Explanation
The Regulation T margin requirement for ABC is 50% of $3,000, or $1,500. The short margin requirement for XYZ is 50% of $10,000, or $5,000. This results in a total Regulation T requirement of $6,500. Since both short option positions are covered, the premium is credited to the account. You wind up with a $1,700 ($500 + $1,200 = $1,700) credit balance from the covered options. The deposit would be $4,800, Regulation T is still $6,500. Be very careful of what FINRA is specifically asking for in the questions.
LO 3.a
One of the associated persons in your office borrows $7,500 from a customer who also happens to be a close friend of the AP. Both the customer and the AP sign and date the agreement detailing the repayment plan. The agreement contains an interest rate and a term length. The AP maintains one of the original documents and provides a copy to the principal of the firm. Which of the following statements is true?
A)
Because the lending arrangement is based on a personal relationship outside of the broker-customer relationship, it is compliant with FINRA rules.
B)
Providing a copy of the legal document to a principal is compliant with FINRA rules.
C)
This loan is strictly prohibited and a violation of FINRA rules.
D)
Loans between APs and customers are permissible if there is an outside business or personal relationship.
C)
This loan is strictly prohibited and a violation of FINRA rules.
Explanation
Lending arrangements between registered persons and customers are strictly prohibited. Only under specific circumstances, detailed conditions, and written preapproval are they permitted. Borrowing money from customers is a serious FINRA violation.
LO 3.d
A bullish speculator purchases an Apr 180 S&P 100 Index call for a premium of 3 when the S&P 100 is trading at 179. How much money must the trader deposit?
A)
$895
B)
$300
C)
$1,000
D)
$1,250
B) $300
Explanation
The correct answer is $300. When options are purchased, they must be paid for in full. The dollar value of index option premiums is determined as follows: option quote × size multiplier = dollar value of the premium. The size multiplier for S&P’s 100 Index options and most (but not all) other index options are 100 (3 × $100 = $300).
n an existing margin account, a customer buys 100 DCF at 78 and writes 1 DCF Aug 80 call at 2.50. The margin call (deposit) would be
A)
$3,650.
B)
$3,900.
C)
$5,280.
D)
$5,480.
A) $3,650
Explanation
While the margin requirement is $3,900, the investor receives $250 in premium for writing the option, so the required deposit is $3,650 ($3,900 – $250).
LO 3.c
Options related complaints must be reported to the principal office within what timeframe?
30 days of receipt
TImeline to disclose required information on forms BD, U4 or U5, as applicable, to make any other required filings or to respond to FINRA concerning any customer complaint.
NLT 30 days
Where must customer complaints for options be kept
Separate file labeled “Options Complaints” in OSJ
even if there are no complaints
Timeline to file information on customer complaints to FINRA
within 15 days of the end of each Quarter
Complaints alleging theft, embezzlement or forgery must be submitted to the firm’s designated examining authority (FINRA) promptly no later than…
30 calendar days
Dollar amount for reporting to FINRA if a AP becomes a defendant or respondent in any securities-related litigation or arbitration settled in an amount in excess of…
(1) AP
(2) Member
1) $15,000
2) $25,000
Reporting requirement to FINRA if a AP is subject of an in-house disciplanary action involving suspension, termination or withholding commissions or fines in excess of what amount?
$2,500
FINRA reporting requirements demand that a member firm promptly report to FINRA never later than 30 calendar days after the member knows of (or should have known of) the existence of any of the following except
A)
that an AP has been indicted or convicted or has pleaded guilty or no contest to any criminal offense (including traffic violations).
B)
amendments being made to the Form BD to remain current (e.g., change in address, phone numbers, ownership, officers, branch openings, or closings).
C)
violations of federal securities law.
D)
suspension or expulsion by another self-regulatory organization (SRO).
A)
that an AP has been indicted or convicted or has pleaded guilty or no contest to any criminal offense (including traffic violations).
Explanation
If an AP has been indicted or convicted or has pleaded guilty or no contest to any criminal offense, the AP must report promptly, within 30 days. Traffic violations are not included. Once admitted to membership, a firm must ensure that its Form BD remains current. Amendments to this form (e.g., change in address, phone numbers, ownership, officers, branch openings or closings) must be made, as previously mentioned, promptly but no later than 30 days.
LO 4.c
An associated person (AP) is involved in a car crash. When the police arrive, they give the AP a breathalyzer test, which the AP fails. The AP is later charged with a felony DUI and will have a one year suspended license. As the trial date approaches, the charge is reduced to a misdemeanor DUI. In this situation, the firm
A)
is required to notify the home office within 30 days.
B)
must notify FINRA promptly, no later than 30 days.
C)
must notify FINRA within 15 days of the end of the calendar quarter.
D)
is permitted not to take any action.
B)
must notify FINRA promptly, no later than 30 days.
Explanation
A felony DUI is a reportable event and needs to be reported within the prescribed time frame even if the charges were reduced. The fact is that the AP was charged with a felony. Reduced or not, it must be reported promptly, no later than 30 days.
LO 4.c
Through a sale, your firm wants to transfer 10% ownership from one of the senior partners to the new chief operating officer of the broker-dealer. Upon completion of the equity transfer, the firm is required to
A)
amend the U4 of the senior partner.
B)
wait for FINRA approval of the transfer.
C)
amend the Form BD with FINRA promptly, but no later than 30 days.
D)
amend the U4 of the chief operating officer.
C)
amend the Form BD with FINRA promptly, but no later than 30 days.
Explanation
Once admitted to membership, a firm must ensure that its Form BD remains current. Amendments to Form BD (e.g., change in address, phone numbers, ownership, officers, branch openings or closings) must be made promptly but no later than 30 days. Under certain circumstances, the firm would not need FINRA approval for transfers less than 25% of ownership. The U4s would not require amending, just the Form BD.
LO 4.c
Any third-party wire transfer draws immediate attention to clearing firms, compliance officers, and the regulators. In a third-party wire transfer, the funds are
A)
not going to the beneficial owner.
B)
going to an agent for the customer.
C)
going to the beneficiary.
D)
held until the beneficial owner signs a third-party consent form for future transactions.
A)
not going to the beneficial owner.
Explanation
Third-party wire transfers are sent to someone other than the beneficiary. Most clearing firms will not accept or process third-party wire transfers.
LO 4.c
Moving a position that was put in error in a customer’s cash account to their margin account or IRA requires the firm to do what?
Cancel/Rebill
Unmatched Trades
If an option trade remains unmatched after the end of the trading day, it must be resolved no later than what timeframe prior to the opening of trading on the following business day?
No later than 15 minutes prior to opening of trading day
Error Accounts
The order ticket for execution for an error account would be marked how?
“F” for Firm and
Opening or Closing
Nullification and Adjustment of Options Transactions (including Obvious Errors)
Customer Order filing must be received by the exchange within what timeframe of execution?
30 minutes
Nullification and Adjustment of Options Transactions (including Obvious Errors)
NonCustomer (Institutional or Proprietary) Order filing must be received by the exchange within what timeframe of execution?
15 minutes
All error reports must be reviewed and signed by who?
the CEO
An associated person at your firm accidentally writes the wrong number of options on the trade ticket. The trade is executed with more options than it should have had. The customer will receive a cancel/rebill with the correct number of contracts. The excess options need to be transferred into the error account. The error account order ticket should be marked
A)
customer closing.
B)
firm closing.
C)
customer opening.
D)
firm opening.
B) Firm Closing
Explanation
The trade ticket for execution in the error account would be marked firm closing. An error account is a firm account not a customer account. The error trade would be closing the excess number of contracts in the customer’s account.
LO 5.b
A trade execution report involving the purchase of options shows an erroneous account number not belonging to the customer who entered the order.
A)
must be made in writing to the person designated to receive such reports, such as a branch office manager (BOM) or principal as soon as it is determined how the error occurred and with whom responsibility lies.
B)
must be made in writing to a Registered Options Principal (RPO) because the trade involved options contracts as soon as it is determined how the error occurred and with whom responsibility lies.
C)
must be made immediately in writing to a Registered Options Principal (RPO) because the trade involved options contracts.
D)
report of this error must be made immediately in writing to the person designated to receive such reports, such as a branch office manager (BOM) or principal.
D)
report of this error must be made immediately in writing to the person designated to receive such reports, such as a branch office manager (BOM) or principal.
Explanation
If an error exists, FINRA rules require that a record of the error be reported to the person designated to receive such error reports by the firm immediately in writing. At a broker-dealer, that individual would always be a BOM or someone who holds a principal’s license. There is no requirement that the person be an ROP if the trade involves options contracts.
LO 5.b
A cancel/rebill may occur for various reasons, which could include all of the following except
A)
having an incorrect approval level for options trading.
B)
entering a trade into an incorrect account.
C)
moving a position from a customer’s cash account to a margin account.
D)
sending out a confirmation with an incorrect price.
A)
having an incorrect approval level for options trading.
Explanation
A cancel/rebill is necessary when an element in a trade or account is incorrect. The cancel/rebill must be changed to reflect the correct element. A change in a customer’s level of options trading would not generate a cancel or rebill of a trade.
LO 5.a
Written option complaints must be maintained
A)
in a separate file marked specifically for option customer complaints.
B)
in the Registered Options Principal’s broker account folder.
C)
in a file for all customer complaints.
D)
in the registered representative’s personnel account file.
A)
in a separate file marked specifically for option customer complaints.
Explanation
All customer complaints must be maintained in a separate file marked specifically as option customer complaints. They cannot be commingled with equity complaints or any other complaints.
Which of the following statements regarding errors and cancel/rebills is most accurate?
A)
An error must be approved by a principal, and a cancel/rebill must be monitored by a principal.
B)
An error must be monitored by a principal, and a cancel/rebill must be approved by a principal.
C)
An error must be monitored by a principal, and a cancel/rebill must be monitored by a principal.
D)
An error must be approved by a principal, and a cancel/rebill must be approved by a principal.
B)
An error must be monitored by a principal, and a cancel/rebill must be approved by a principal.
Explanation
A branch office manager or compliance officer must know the reasons for the change and must approve the change in writing. Any change, even something as seemingly minor as moving a position from a customer’s cash account to a margin account or an IRA, requires the cancel/rebill procedure to be followed.
LO 5.b
A cancel/rebill is not usually generated for an error in
A)
a margin calculation.
B)
execution.
C)
posting.
D)
reporting.
A)
a margin calculation.
Explanation
An error regarding margin maintenance would not generate a cancel/rebill. All the other errors would.
LO 5.b
A cancel/rebill is a written record for FINRA. This would generate a new
A)
account statement.
B)
confirmation.
C)
trade adjusted journal.
D)
interested party duplicate confirm.
B)
confirmation.
Explanation
A cancel/rebill would generate confirmations to both the customer account and the error account.
LO 5.b
The firm’s error account is
A)
a margin account.
B)
a trading account.
C)
a proprietary account.
D)
a customer account.
C)
a proprietary account.
Explanation
An account maintained at the broker-dealer for the purpose of holding positions that have resulted due to an error is known as an error account. They are usually coded “X” for clearing purposes, and they are propriety accounts affecting the firm’s net capital.
LO 5.a
Threshold for Large Options Positions Reports (LOPR)
200 Contracts on hte same side of the market
When must LOPRs be reported to the OCC LOPR system
NLT 9PM CT on the trade date
Position Limits
Increments commonly seen on the same side of the market
250,000
200,000
75,000
50,000
25,000
Exercise Limit
of options contracts of a single class that any account can exercise within 5 consecutive business days
(or group of accounts acting in concert)
Calculating Position Limits and Exercise Limits includes what types of options positions
Standard Options
LEAPS
Jumbo Contracts
Mini-Option Contracts
Position & Exercise limits for discretionary accounts
Registered Rep’s accounts added together
Days aggregated together to calculate exercise limits
5 consecutive business days
Hedge Fund exception with a Position Limit of 200,000 contracts but Exercise Limit of 50,000 can execute how many over what time frame?
50,000 over 5 consecutive business days
OCC Times and Dates for Stock Options
1) Listed Equity Options Cease Trading
2) Latest Options Contract can be exercised by the customer or holder
1 ) 4PM ET on the 3rd Friday of the month
2) 5:30PM ET on the 3rd Friday of the month
OCC Times and Dates for Stock Options
1) Listed Equity Options Cease Trading
2) Latest Options Contract can be exercised by the customer or holder
3) Options Expire
1) 4PM ET on the 3rd Friday of the month
2) 5:30PM ET on the 3rd Friday of the month
3) Between 5:30 and 11:59PM ET
Order Origin Codes
“B”
Broker Dealer Account Orders
Order Origin Codes
“C”
Customer Orders
Order Origin Codes
“F”
OCC Clearing Member Firm proprietary account orders
Order Origin Codes
“M”
Market Maker Orders
Who has priority when traders are filling orders
Customer orders have priority over Firm “F”, Broker Dealer “B”, and Market Makers “M”
Entering orders that are designed to change the closing price of a security
Marking the Close or
Marking the Market
Regulation SHO
Stock decline % to trigger Circuit Breaker
10%
Regulation SHO
How long does the Circuit Breaker remain in effect?
remainder of the trading day and the following day.
Regulation SHO
Exception to allow Short Sale during Circuit Breaker and how must Order Tickets be marked
Only at a price above the Current NBB
Short Exempt
Who are exempt from Regulation SHO and how do orders need to be marked
Market Makers
Short Exempt
Giving exercise instructions for options, warrants, rights, or convertible securities such as bonds or preferred stock during a circuit breaker under Regulation SHO
Qualify for Short Exempt Status
Tag number for securities on the easy-to-borrow list?
Not required but must retain a copy of the list.
Stocks that have “failed to deliver” for 5 consecutive days on a position of 10,000 shares or more, or a position of 0.5% of the issuer’s total outstanding shares.
Threshold Securities
How often is the Threshold Securities List published by the exchanges?
Daily
Firms are required to send their LOPR batch file to the OCC NLT
9PM ET on or before T+1
Authorized Third Party Disbursements against a Full POA will be made out how
in the account name (not Third Party’s)
Required marking on an Option Sell Order
“Covered” or “Uncovered”
Current Market Price of the Security & Client’s Name & Address on an order ticket
Would not appear there
When entering a limit order ticket for a spread or straddle, the order must
A. be broken up into two separate order tickets
B. specify a maximum net debit or a minimum net credit
C. show the customer-approved level for options trading
D. all of these
B. specify a maximum net debit or a minimum net credit
Orders for spreads and straddles can be entered as what types of orders
market orders or limit orders
Orders for spreads and straddles that are entered as limit orders must have what specified on the ticket?
Max net debit or min net credit
The Large Option Position Report (LOPR) must be submitted by broker-dealers to
A)
the Chicago Board Options Exchange (CBOE).
B)
the Options Clearing Corporation (OCC).
C)
the Financial Industry Regulatory Authority (FINRA).
D)
the Office of Financial Asset Control (OFAC).
B) the Options Clearing Corporation (OCC)
Explanation
Broker-dealers must submit a LOPR to the OCC whenever a position in an account or accounts acting in concert exceeds the filing threshold for contracts on the same side of the market. For most securities, the threshold is 200 contracts.
An associated person sold 10 in-the-money call options for a customer who had no previous equity or option positions. The next week the customer was assigned on the short calls. The customer would need to place an order to
A)
sell 1,000 shares of the underlying security and mark the ticket sell long.
B)
buy 1,000 shares of the underlying security.
C)
sell 1,000 shares of the underlying security and mark the ticket sell short.
D)
sell 1,000 shares of the underlying security and mark the ticket sell short exempt.
B)
buy 1,000 shares of the underlying security.
Explanation
Since the customer was short calls and they were exercised, the customer would now need to buy 1,000 shares of the underlying to cover the stock that must be delivered. The customer would buy 1,000 shares of the underlying security.
LO 6.d
An order management system’s primary function is to
A)
affirm trades with the clearing company.
B)
route trades to exchanges, electronic communication networks (ECNs), and market-makers for execution.
C)
allocate trades into customer’s accounts.
D)
provide self execution for proprietary trades.
B)
route trades to exchanges, electronic communication networks (ECNs), and market-makers for execution.
Explanation
An order management system (OMS) is a trading routing system that facilitates and manages the execution of securities orders.
LO 6.f
Consider a situation in which the circuit breaker rule is in effect and the information in the table below is true. What is the lowest price at which a short sale can take place under the circuit breaker rule?
Last Trade$43.96National Best Bid$43.97National Best Offer$43.99
A)
$43.99
B)
$43.98
C)
$43.97
D)
$43.96
B)
$43.98
Explanation
Short sales will not be permitted unless the short sale order is executed at a price above the current national best bid. The national best bid is $43.97; therefore, the short sale must be at or above $43.98. The lowest price above $43.97 is $43.98.
LO 6.d
A Qualified Contingent Cross (QCC) order must
A)
be priced at or better than the national best bid and offer (NBBO).
B)
not be coupled with a contra-side order.
C)
be a multi-leg trade that represents at least 100 contracts per separate leg.
D)
represent less than 1,000 option contracts.
A)
be priced at or better than the national best bid and offer (NBBO).
Explanation
Qualified Contingent Cross (QCC) is a type of a block trade options order. The orders (either buy or sell) are multi-leg trades that must be coupled with a contra-side order or orders totaling an equal number of contracts.
LO 6.d **This question deals with material not covered in your LEM, but it relates to recent student feedback.
The exercise limit for options in a security
A)
is determined by the primary designated market maker, a specialist, for the security.
B)
is determined by FINRA based on capitalization and volume for the stock.
C)
is determined by the CBOE based on capitalization and volume for the stock.
D)
usually matches the position limits for the stock.
D)
usually matches the position limits for the stock.
Explanation
The maximum number for the exercise limit for the consecutive business five-day period usually matches the position limits for the stock.
LO 6.b
An institutional account has exercised 100 call options. The same account wants to sell 10,000 shares of the underlying stock the next day. Using the information provided in the table below, with the circuit breaker rule in effect, how should the ticket be marked and at what price can the stock be sold without being in violation?
Last Trade$43.97National Best Bid$43.96National Best Offer$43.99
A)
The ticket would be marked a short sale, and the price must be $43.99 or higher.
B)
The ticket would be marked a short sale, and the price must be $43.97.
C)
The ticket would be marked short exempt sale, and the price could be $43.96.
D)
The ticket would be marked short exempt sale, and the price must be $43.98 or higher.
C)
The ticket would be marked short exempt sale, and the price could be $43.96.
Explanation
The sale is a short exempt sale because the customer exercised the calls before entering the order. Being a short exempt sale, it could occur at any price. The rule that the trade can only be at a price above the current national best bid does not apply because the stock is short exempt. The institutional account exercised the calls.
LO 6.d
Regulation SHO requires that orders be marked short exempt when
A)
the circuit breaker rule is triggered.
B)
a stock location is established.
C)
the corresponding convertible security has been exercised.
D)
the registered clearing agency has a failure to deliver the stock.
C)
the corresponding convertible security has been exercised.
Explanation
Marking a trade order short exempt requires that the options, warrants, convertible bonds, or convertible preferred stock are exercised before the short sale. This practice is often used in connection with options and especially with same-day option exercise. The uptick rule and circuit breaker rules do not apply to short exempt trades. A person is deemed to own a security if she purchased but has not yet received it, purchased a convertible security and has tendered it for conversion, or has an option to purchase the stock and has exercised it, or has rights or warrants to subscribe to it and has exercised them. A slang term used by trading desk brokers or floor brokers would refer to the trade as “sexy,” meaning “short exempt.”
LO 6.g
Who gets notified when a customer exceeds the position limit and what timeline is required?
FINRA’s Market Regulation Department
NLT T+1
Miscounts of options positions held on the same side of the market on the same underlying security or number of options contracts exercised in a five-day period are considered what?
Minor Rule Violations (MRVs)
The maximum number of contracts that can be exercised in a consecutive five-day period usually matches what?
The position limits for the stock
The date that a Firm establishes, modifies, or closes a LOPR position is known as what?
The Effective Date
Settlement when an option is assigned
T+2
Settlement when an option is bought/sold
T+1
How does the OCC conduct an Assignment of Exercise?
Random Method
Typical method for Firms to conduct an Assignment of Exercise?
FIFO
Exercise by Exception Rule of OCC
1 penny in the money gets exercised on expiration
Contrary Exercise Advice (CEA)
What is it and what’s the deadline
Not exercising when in the money or exercising when out of the money
Deadline: 5:30PM ET 3rd Friday
This is used to cancel a Contrary Exercise Advice (CEA) and what is the deadline as well?
Advice Cancel
Deadline: 5:30PM ET 3rd Friday
What type of action results in no adjustment in the options contract.
Cash Dividends
After a 2:1 stock split, 1 XYZ 60 Call becomes what?
2 XYZ 30 Calls
After a 3:2 split, 1 ABC 60 Call becomes what?
1 ABC 40 Call with 150 shares in the new contract
(100 shares x 3/2 = 150)
($6,000 / 150 = 40 new strike price)
QRS Corporation pays a 20% stock dividend. After the payment of the dividend, what will the adjustment be on the following position?
1 QRS 30 Call
1 QRS 25 Call with 120 shares in the new contract
(100 shares x 20% = 20 additional new shares)
($3,000 / 120 = 25 new strike price)
After a 1:20 Reverse Split, 1 XYZ Jul 30 Call becomes what?
1 XYZ Jul 600 Call with 5 shares in the new contract
($100 shares x 1/20 = 5 total shares)
($3,000 / 5 = 600 new strike price)
What is necessary before a firm may implement an assignment method?
FINRA approval &
Customer Notification
Physical Settlement
when the trade completes the transfer of the security to the buyer from seller by T+2.
Type of Settlement common on American Style Contracts
Physical Settlement
European Style Contracts
Holder may only exercise option on expiration
European Style Contract settlement type
Cash Settlement
Clearing Member Trade Agreement (CMTA)
Primer Brokerage Account using multiple brokers by an Institutional Customer to execute options trades.
If a trading system is adjusted so that it routes any trade for less than 10 options to automatic execution, the order will go directly to…
A. The Floor Broker
B. The Trading Booth
C. The Exchange Floor’s Order Book
D. The Odd-Lot Desk
C. The Exchange Floor’s Order Book
Exercises and assignments occur close to expiration because there is almost no time premium remaining. Many investors exercise deep-in-the-money calls to
A)
all of these.
B)
put a squeeze on the short positions.
C)
lower their position for the position limit rule.
D)
capture a dividend or a special dividend from the underlying security.
D)
capture a dividend or a special dividend from the underlying security.
Explanation
If a stock has a special dividend, a short in-the-money call will probably be assigned to capture the dividend. Currently, there are many dividend capture programs in the marketplace. An assignment could leave your customer without the dividend and a flat position.
LO 7.d
The supervisory procedures for market access for options require a system of risk management that
A)
is regulated by the exchanges.
B)
must be FINRA approved.
C)
is reasonably designed to reflect the normal trading activities of the firm.
D)
protects the customer’s trading activities.
C)
is reasonably designed to reflect the normal trading activities of the firm.
Explanation
The system of risk management and supervisory procedures must be reasonably designed to reflect the normal trading activities of the firm and protect against financial, regulatory, and operational risks that might occur.
Upon the exercising of an option, the firm must notify
A)
the branch office.
B)
the writer.
C)
the OCC.
D)
the exchange.
C)
the OCC.
Explanation
The hours between 5:30 pm (the latest an option can be exercised) and 11:59 pm on the third Friday of the expiry month allow firms time to clear their books of options transactions by notifying the OCC.
The impact of option contract assignments for customers who are prepared can add value to their portfolio. One way would be to
A)
buy stock below the current market value price.
B)
exercise the contracts and take advantage of the premium loss.
C)
assign the contracts that have excess time value.
D)
all of these.
A)
buy stock below the current market value price.
Explanation
Prepared customers are usually able to buy stock lower than the current market value (CMV) price. Buying stock at a lower price than the current market price is done by selling at- or in-the-money puts and having them be assigned. The writer gets to keep the time and intrinsic values and purchases the stock at the strike price.
LO 7.d
Receive versus payment (RVP) is a form of
A)
equity and options settlement between broker-dealers in which payment will occur provided there is a delivery.
B)
a settlement between institutional customers in which payment will occur provided there is a delivery.
C)
equity settlement between broker-dealers in which payment will occur provided there is a delivery.
D)
options settlement between broker-dealers in which payment will occur provided there is a delivery.
C)
equity settlement between broker-dealers in which payment will occur provided there is a delivery.
Explanation
Receive versus payment is the mirrored opposite form of settlement from a delivery versus payment (DVP) settlement. In an RVP settlement, payment occurs when there is delivery. This transaction is simultaneous.
Each of the following settle next business day except
A)
trade of an equity option.
B)
trade of an index option.
C)
exercise of an index option.
D)
exercise of an equity option.
D)
exercise of an equity option.
Explanation
Exercise of equity options results in a purchase or sale of the underlying stock. Stock transactions settle regular way— T + 2 (in two business days).
LO 7.c
The order management systems (OMS)
A)
are controlled by the exchanges.
B)
can be customized to automatically send small orders to the order book.
C)
have interchangeable MPID numbers for market-maker access.
D)
are usually a fixed product of the clearing firms and cannot be adjusted.
B)
can be customized to automatically send small orders to the order book.
Explanation
For small market orders and small executable limit orders, the order management system may be set to automatic execution.
All of the following elements of a listed stock option may change as a result of a stock split except
A)
the exercise price.
B)
the premium.
C)
the expiration month.
D)
the contract size.
C)
the expiration month.
Explanation
After a stock split, the option’s contract size, strike price, and premium change. The expiration month is not affected by a stock split.
LO 7.e
The Hybrid Opening System helps to align orders for an opening range to facilitate the opening trade in an option series. The opening quote and trade must be entered by
A)
any of these.
B)
a floor official.
C)
the designated primary market maker or specialist.
D)
the floor brokers.
C)
the designated primary market maker or specialist.
Explanation
The designated primary market maker or specialist must enter opening quotes and trades.
The impact of option contract assignments for customers who are prepared can add value to their portfolio. One way would be to
A)
none of these.
B)
sell stock a little higher than the current market value price.
C)
assign the contracts that have excess premiums.
D)
exercise the contracts and take advantage of the intrinsic value.
B)
sell stock a little higher than the current market value price.
Explanation
Prepared customers are usually able to sell stock a little higher than the current market value price. Selling stock at a higher than current market price is done by selling at- or in-the-money calls and having them be assigned. The writer gets to keep the time and intrinsic values and sell the stock at the strike price.
LO 7.d
All orders entered through direct market access are identified by the
A)
market participant identifiers (MPID) of the clearing member firm.
B)
market participant identifiers (MPID) of the member firm.
C)
broker-dealer’s access code.
D)
broker-dealer’s registration code
B)
market participant identifiers (MPID) of the member firm.
Explanation
Any securities trading would be done through the market participant identifiers (MPID) of the member firm, which specifically identifies the firm and makes the firm responsible for all of its trading activity.
An order management system (OMS) has internal controls which can
A)
affirm trades automatically.
B)
enhance order flow.
C)
restrict access.
D)
provide liquidity.
C)
restrict access.
Explanation
An order management system must have controls in place to restrict access. Unfiltered or naked access is prohibited.
LO 7.a **This question deals with material not covered in your LEM, but it relates to recent student feedback.
Correspondence
25 or fewer in 30 calendar days
An ROP must approve each Retail Communication when?
before
1) its first use or
2) filing AT LEAST 10 Calendar Days before filing with FINRA’s Advertising Regulation Department
Whichever is earlier
Posts on social media interactive sites would be subject to what?
Principal preapproval
Performance projections for an annualized return given is based on a minimum of how many days of experiance
60 days
When past performance is included in communications with the public, it must be based on all similar recommendations for at least the past…
12 months
Within the first year of an options broker-dealer, retail communications are required to
be approved by the ROP
submitted to FINRA at least 10 CALENDAR DAYS of first use
Use of a standard options worksheet by a firm
Template must be approved by ROP
(filled out templates do not require approval)
How often does an ROP need to review filled inOptions Worksheets
“Frequently”
How long do completed options worksheets need to be kept on file?
3 years
Public appearances or speaking activities that are unscripted
1) Categorization
2) Approval Level
1) Not Retail Communications, Correspondence or Institutional Communications
2) Do not require Approval
Public appearances or speaking activities that are scripted
1) Categorization
2) Approval Level
1) Retail Communication
2) Principal Preapproval
Telemarketing scripts must be accompanied by what?
Options Disclosure Document (ODD)
A Standardized options worksheet must be approved for use by who?
The ROP
(not FINRA)
Regarding the preopening rotation for options trading the Hybrid Opening System (HOSS), which statement is false?
A)
The HOSS will accept orders and quotes.
B)
The HOSS will disseminate to floor brokers, market makers, and designated primary market makers’ (DPMs) information about orders in the eBook that remain from the previous business day and any orders submitted before the opening.
C)
Spread orders and contingency orders participate in the opening trade or the determination of the opening price.
D)
The HOSS for the class is permitted to enter opening quotes.
C)
Spread orders and contingency orders participate in the opening trade or the determination of the opening price.
Explanation
Spread orders and contingency orders do not participate in the opening trade or the determination of the opening price. For a period before the opening of trading in an underlying security, the HOSS will accept orders and quotes. The HOSS will disseminate to floor brokers, market makers, and DPMs’ information about resting orders in the eBook that remain from the previous business day and any orders submitted before the opening. The DPM for the class must enter opening quotes.
LO 7.a
For small-market orders and small executable limit orders, the electronic order routing/execution system may select automatic execution. Which of the following statements about these orders is not correct?
A)
The order is sent directly to the trading post on the exchange floor.
B)
The orders bypass the commission house booth and floor broker on the exchange floor.
C)
The execution is sent directly to the designated primary market maker.
D)
Each order is executed against an order on the limit order book or a market maker’s quote.
C)
The execution is sent directly to the designated primary market maker.
Explanation
For quicker action, the system bypasses the commission house booth and floor broker on the exchange floor and instead sends the order directly to the trading post on the exchange floor. Each order is executed against an order on the limit order book or a market maker’s quote, and the notice of execution is sent directly to the broker-dealer.
LO 7.a
Which of the following statements regarding exercise and position limits for jumbo contracts is true?
A)
Jumbo contracts will only be combined with minioption contracts when calculating position and exercise limits.
B)
Jumbo contracts will be combined with regular standard and minioption contracts when calculating position and exercise limits.
C)
Jumbo contracts will never be combined with regular standard or minioption contracts when calculating position and exercise limits.
D)
Jumbo contracts will only be combined with regular standard contracts when calculating position and exercise limits.
B)
Jumbo contracts will be combined with regular standard and minioption contracts when calculating position and exercise limits.
Explanation
Jumbo contracts will be combined with both regular standard and minioption contracts for calculating position or exercise limits on any underlying. For position or exercise limit purposes, each jumbo contract equals 10 regular standard contracts, and 10 minioption contracts equals one regular standard contract.
LO 7.b
Which of the following delivery and payment requirements for an uncovered assignment is correct?
A)
Deposit the required margin as promptly as practicable in accordance with regulations.
B)
Deposit full cash payment of the aggregate exercise price in the case of a call option.
C)
Deposit the underlying stock in the case of a put option contract.
D)
Deposit the option contract for next-day settlement.
A)
Deposit the required margin as promptly as practicable in accordance with regulations.
Explanation
Deposit the required margin as promptly as practicable under Federal Reserve Board regulations. The option contract is short. You would deposit cash for an assigned put contract and stock for an assigned call contract.
LO 7.i
The writer of an equity call option who is exercised
A)
can enter a closing transaction any time before exercise settlement.
B)
must deliver the stock in one business day.
C)
can enter a closing transaction on the day the exercise notice is received.
D)
must deliver the stock in two business days.
D)
must deliver the stock in two business days.
Explanation
If exercised, call writers must deliver the underlying stock within two business days.
LO 7.i
All of the following statements regarding customer notification methods are correct except
A)
each member firm must obtain prior approval from the exchange.
B)
each member firm must have fixed procedures.
C)
each member firm must preserve its method of allocation for three years.
D)
each member firm must select customers to receive notifications.
D)
each member firm must select customers to receive notifications.
Explanation
Each member firm must have fixed procedures, obtain prior approval from the exchange, and preserve its method of allocation for three years. The firms do not select the customers to receive the notifications; the first in-first out method selects the customers.
Your firm submits a retail communication to the FINRA Advertising Regulation Department 10 days prior to its use. FINRA notifies the firm that the communication is disapproved. The proper course of action would be to
A)
correct the communication, then refile it, and receive FINRA’s approval before the communication can be used.
B)
distribute the communication and add a disclaimer that FINRA has disapproved of its use.
C)
correct the communication and then refile it in order to meet FINRA’s applicable standards before the communication can be used.
D)
correct the communication according to FINRA’s guidelines and then distribute the communication.
C)
correct the communication and then refile it in order to meet FINRA’s applicable standards before the communication can be used.
Explanation
If a communications piece is rejected by an SRO like FINRA or an exchange, it must be corrected and refiled, and it must meet applicable standards before it can be used. FINRA will only disapprove of the use of any communications until any changes specified by FINRA are corrected.
LO 8.a
