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sie chapter 9-12 Flashcards

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1
Q

What is the primary purpose of the premium in an options contract?

a. Obligation
b. Time value
c. Intrinsic value
d. Strike price

A

b. Time value
The premium in an options contract primarily represents the time value, indicating the market’s expectation of potential price movements during the contract’s lifespan.

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2
Q

What does “hedging” involve in the context of options trading?

a. Making a bet on future prices
b. Protecting an existing position
c. Generating additional income
d. Trading options contracts

A

b. Protecting an existing position

Hedging in options trading involves protecting an existing core long or short position, either for individual securities or an entire portfolio, from adverse price movements

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3
Q

Who is referred to as “short the contract” in options trading?

a. Option holder
b. Option writer
c. Contract buyer
d. Contract seller

A

b. Option writer

Being “short the contract” in options trading refers to the option writer, who has the obligation to fulfill the terms of the contract if the option holder chooses to exercise it.

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4
Q

What is the term for options contracts that give the holder the right to buy the underlying stock?

a. Puts
b. Calls
c. Premiums
d. Intrinsic value

A

b. Calls

buyer=holder=long
Calls provide the holder with the right to buy the underlying stock, making them suitable for bullish strategies where the investor anticipates a rise in stock prices.

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5
Q

When is the strike price of an option contract determined?

a. By the option holder
b. By the Options Clearing Corporation (OCC)
c. At the time of exercise
d. At the time of contract creation

A

b. By the Options Clearing Corporation (OCC)

The strike price of an option contract is standardized and set by the Options Clearing Corporation (OCC), providing consistency in the options market

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6
Q

What does “LEAPS” stand for in the context of options?

a. Long-term Equity Anticipation Securities
b. Limited Exercise and Premium Strategy
c. Leverage in Earnings and Assets of Preferred Stocks
d. Longitudinal Equity Adjustment and Portfolio Securities

A

a. Long-term Equity Anticipation Securities

LEAPS stands for Long-term Equity Anticipation Securities, indicating that these options have a longer expiration period, extending up to three years.

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7
Q

What is the maximum potential loss for both call and put buyers?

a. Intrinsic value
b. Premium paid
c. Strike price
d. Time value

A

b. Premium paid

The premium paid is the maximum potential loss for both call and put buyers, representing the amount spent to acquire the option.

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8
Q

How is the settlement period for stock options different from stocks?

a. Options settle on the same day as the trade.
b. Options settle one business day after the trade date.
c. Options settle two business days after the trade date.
d. Options settle three business days after the trade date.

A

c. Options settle two business days after the trade date

Unlike stocks, options settle two business days after the trade date, a critical distinction for understanding the timing of options transactions.

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9
Q

Which style of options can be exercised at any time?

a. European style
b. American style
c. Asian style
d. Australian style

A

b. American style

American-style options can be exercised at any time before expiration, providing flexibility to option holders compared to European-style options.

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10
Q

What is the primary factor that determines whether an option is in the money or out of the money?
a. Strike price

b. Premium
c. Time value
d. Market price

A

a. Strike price

Whether an option is in the money or out of the money is primarily determined by comparing the strike price to the market price of the underlying asset

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11
Q

If a customer buys 2 XYZ Jan 60 calls at $4 each, what is the total premium paid?

a. $2
b. $4
c. $8
d. $16

A

c. $8

To calculate the total premium paid for buying options, multiply the number of contracts by the premium per contract: 2 contracts * $4 each = $8.

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12
Q

A customer buys 5 ABC Feb 70 puts at $6 each. What is the total premium paid?

a. $25
b. $30
c. $35
d. $40

A

b. $30

The total premium paid for buying options is obtained by multiplying the number of contracts by the premium per contract: 5 contracts * $6 each = $30.

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13
Q

If the market price of a stock is $55, and a call option has a strike price of $50, what is the intrinsic value?

a. $5
b. $10
c. $15
d. $20

A

a. $5

The intrinsic value of a call option is the positive difference between the market price ($55) and the strike price ($50), resulting in $5.

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14
Q

A put option has a strike price of $80, and the market price is $75. What is the intrinsic value?

a. $5
b. $10
c. $15
d. $20

A

A. $5
The intrinsic value of a put option is the positive difference between the strike price ($80) and the market price ($75), resulting in $5.

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15
Q

A customer buys 3 XYZ Mar 65 calls at $8 each. If the market price rises to $75, what is the total profit?

a. $200
b. $600
c. $400
d. $500

A

b. $600

300*8= 2400

75*300=$22,500

65*300= $19,500

$22,500-$21900= $600

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16
Q

If a call option has a strike price of $90 and a premium of $12, what is the breakeven point for the call buyer?

a. $102
b. $90
c. $78
d. $88

A

a. $102

The breakeven point for a call buyer is obtained by adding the strike price ($90) to the premium paid ($12), resulting in $102.

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17
Q

A customer sells 4 ABC Nov 50 puts at $7 each. What is the maximum potential profit for the customer?

a. $200
b. $2800
c. $2000
d. $-2800

A

b. $2800

The customer sold 400 ABC Nov 50 puts at $7 each, so the total premium received is:

Total premium = Number of options * Premium per option
= 400 * $7
= $2800

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18
Q

If a put option has a strike price of $40 and a premium of $5, what is the breakeven point for the put buyer?

a. $45
b. $35
c. $30
d. $25

A

B. $35

40-5= $35

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19
Q

A customer sells short 100 shares of XYZ at $60 and writes 1 XYZ Aug 60 call at $6. What is the covered call strategy’s maximum gain?

a. $600
b. $700
c. $800
d. $900

A

a. $600

The maximum gain for a covered put strategy is the premium received ($6) multiplied by the number of contracts (1) and the contract size (100 shares): $6 * 100 = $600. The seller also retains the premium received for selling the put

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20
Q

If a customer owns 200 shares of ABC at $75 and buys 2 ABC Jul 70 puts at $5 each, what is the maximum potential loss?

a. $500
b. $1,000
c. $1,500
d. $2,000

A

d. $2,000

The maximum potential loss for the customer who owns 200 shares of ABC at $75 and buys 2 ABC Jul 70 puts at $5 each is calculated by subtracting the new market price ($60, assuming the stock drops to the put’s strike price) from the initial stock price ($75), multiplied by the total number of shares (200): (75 - 60) * 200 = $2,000.

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21
Q

An investor owns 100 shares of XYZ stock at $75 per share. The investor decides to sell 1 call option with a strike price of $80 for a premium of $3. If the market price at expiration is $85, calculate the investor’s overall profit or loss, taking into account the covered call strategy.

A

Overall Profit/Loss = ($85 - $75) + ($3 - Call Buyback Cost)
The covered call strategy limits gains as the stock is called away at the strike price. If the call buyback cost is less than $3, the investor profits from the premium.

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22
Q

A trader holds 200 shares of ABC stock at $50 per share and writes 2 call options with a strike price of $55 for a premium of $4 each. If the stock price falls to $48, analyze the impact of the covered call strategy on the trader’s position.

A

Overall Position Value = (200 * $48) - (2 * $4) + (Remaining Stock Value)
The covered call helps mitigate losses, but the investor faces losses if the remaining stock value is less than the call option loss.

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23
Q

An options trader shorts 50 shares of XYZ stock at $60 per share and sells 1 put option with a strike price of $55 for a premium of $5. If the market price at expiration is $50, calculate the trader’s net profit or loss with the covered put strategy.

A

Net Profit/Loss = ($5 + Put Buyback Value) - (50 * ($60 - $50))
The covered put strategy provides protection, and the net profit depends on the put buyback value compared to the initial premium.

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24
Q

An investor is bearish on DEF stock and decides to implement a covered put strategy by shorting 1 put option with a strike price of $70 for a premium of $8, while simultaneously holding 100 shares of DEF stock at $75 each. If the stock price drops to $65, assess the effectiveness of the covered put in managing losses.

A

Net Profit/Loss = ($8 + Put Buyback Value) + (100 * ($75 - $65))
The covered put strategy limits losses on the stock position and profits from the initial put premium.

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25
Q

A trader buys 4 put options with a strike price of $90 and a premium of $8 each. If the market price falls to $85, determine the trader’s optimal exit strategy to minimize losses and maximize potential gains.

A

To minimize losses, the trader may consider exercising the put options at $90, limiting the loss to the premium paid. Alternatively, the trader could sell the put options to cut losses if they believe the stock price won’t recover.

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26
Q

Who is the holder of an options contract?

a. Buyer
b. Seller
c. Writer
d. All of the above

A

a. Buyer
Explanation: The holder of an options contract is the buyer. This individual has the right, but not the obligation, to exercise the option.

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27
Q

What is another term for the buyer of an options contract?

a. Holder
b. Short
c. Writer
d. Seller

A

a. Holder
Explanation: Another term for the buyer of an options contract is the holder. The holder has the right to exercise the option or let it expire.

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28
Q

What does the seller of an options contract receive?

a. Premium
b. Intrinsic value
c. Strike price
d. Time value

A

a. Premium
Explanation: The seller of an options contract receives the premium. This is the price paid by the buyer for the option.

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29
Q

long call holder?

a. Right to buy
b. right to sell
c. obligation to sell
d.obligation to buy

A

a. Right to Buy
Explanation: A long call holder has the right to buy the underlying stock at the strike price. This is the primary benefit of holding a call option.

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30
Q

short call writer?

a. right to buy
b. obligation to sell
c. Right to sell
d. obligation to buy

A

c. obligation to sell
Explanation: The obligation of a short call writer is to sell the underlying stock if the call is exercised by the buyer.

31
Q

long put holder?

a. Right to buy
b. obligation to sell
c. obligation to buy
d. Right to sell

A

D. Right to sell

Explanation: A long put holder has the right to sell the underlying stock at the strike price. This is the primary benefit of holding a put option.

32
Q

short put writer?

a. Right to buy
b. obligation to sell
c. obligation to buy
d. Right to sell

A

c. obligation to buy
Explanation: The obligation of a short put writer is to buy the underlying stock if the put is exercised by the buyer.

33
Q

What is the premium of an options contract?

a. The price of the underlying stock
b. The cost of the options contract
c. The total value of the options contract
d. The strike price

A

b. The cost of the options contract
Explanation: The premium of an options contract is the cost paid by the buyer to the seller for the right to buy or sell the underlying stock.

34
Q

What does the strike price represent in an options contract?

a. The market price of the underlying stock
b. The premium paid by the buyer
c. The exercise price
d. The time value

A

c. The exercise price
Explanation: The strike price in an options contract represents the exercise price at which the underlying stock can be bought or sold.

35
Q

Which organization standardizes strike prices for options contracts?

a. NYSE (New York Stock Exchange)
b. NASDAQ
c. Options Clearing Corporation (OCC)
d. SEC (U.S. Securities and Exchange Commission)

A

c. Options Clearing Corporation (OCC)
Explanation: The Options Clearing Corporation (OCC) standardizes strike prices for options contracts, ensuring consistency and clearing of trades.

36
Q

When is the last day to trade or exercise options contracts?

a. Thursday of expiration
b. Friday of expiration
c. Saturday of expiration
d. Sunday of expiration

A

b. Friday of expiration
Explanation: The last day to trade or exercise options contracts is Friday of expiration.

36
Q

When can options contracts be traded or exercised?

a. T+1 (Next business day)
b. T+2 (Two business days)
c. T+3 (Three business days)
d. T+4 (Four business days)

A

a. T+1 (Next business day)
Explanation: Options contracts can be traded or exercised, settling on the next business day (T+1).

37
Q

What happens if an options contract expires without being exercised?

a. Buyer loses the premium
b. Seller loses the premium
c. Buyer keeps the premium
d. Seller keeps the premium

A

a. Buyer loses the premium
Explanation: If an options contract expires without being exercised, the buyer loses the premium paid, which is the buyer’s maximum loss.

38
Q

What does a put option obligate the writer to do if exercised?

a. Buy shares at the strike price
b. Sell shares at the strike price
c. Exercise another put option
d. Do nothing

A

a. Buy shares at the strike price
Explanation: A put option obligates the writer to buy shares at the strike price if exercised by the buyer.

39
Q

What does a call option obligate the writer to do if exercised?

a. Buy shares at the strike price
b. Sell shares at the strike price
c. Exercise another call option
d. Do nothing

A

b. Sell shares at the strike price
Explanation: A call option obligates the writer to sell shares at the strike price if exercised by the buyer.

40
Q

How is the premium determined for an options contract?

a. Intrinsic value only
b. Time value only
c. Both intrinsic value and time value
d. Strike price

A

c. Both intrinsic value and time value
Explanation: The premium of an options contract is determined by both intrinsic value (the current profit or loss) and time value (the potential for future profit).

41
Q

When are calls considered “in the money”?

a. When the market price is above the strike price
b. When the market price is below the strike price
c. When the market price is the same as the strike price
d. When the premium is higher than the strike price

A

a. When the market price is above the strike price
market price 55
strike price is 50
Explanation: Calls are considered “in the money” when the market price is above the strike price, indicating a potential profit upon exercise.

42
Q

When are puts considered “in the money”?

a. When the market price is above the strike price
b. When the market price is below the strike price
c. When the market price is the same as the strike price
d. When the premium is higher than the strike price

A

b. When the market price is below the strike price
market price 50
strike price 45
Explanation: Puts are considered “in the money” when the market price is below the strike price, suggesting a potential profit upon exercise.

43
Q

Which strategy is considered bullish?

a. Long Call
b. Short Call
c. Long Put
d. Short Put

A

a. Long Call
Explanation: The long call strategy is considered bullish as it involves buying a call option to benefit from a rise in the underlying stock’s price.

44
Q

What is the purpose of a covered call strategy?

a. Speculation in a falling market
b. Protection against a bear market
c. Generate income and limit upside potential
d. Hedge a short stock position

A

c. Generate income and limit upside potential
Explanation: The covered call strategy aims to generate income for the investor by selling call options while holding the underlying stock, providing limited downside protection but capping the upside potential.

45
Q

A customer buys 200 XYZ Jan 40 calls at $5 each. What is the total premium paid?

a. $40
b. $80
c. $400
d. $1000

A

b. $1000
$5 *2(200) shares = $1000

46
Q

Strike Price and Premium:
If the strike price of an call option is $60, and the premium is $8, how much does the buyer pay for the right to exercise the option?

a. $60
b. $68
c. $52
d. $8

A

b. $68
Explanation: The buyer pays the strike price ($60) plus the premium ($8) to exercise the option, resulting in a total payment of $68.

47
Q

Time Value Calculation:
A customer buys 1 ABC Feb 50 call at $6, and the intrinsic value is $3. What is the time value?

a. $6
b. $3
c. $9
d. $2

A

b. $3
Explanation: Time value is calculated by subtracting the intrinsic value ($3) from the premium ($6), giving a time value of $3.

48
Q

Intrinsic Value and Market Price:
If the market price of XYZ stock is $70, and the XYZ Jan 60 call has an intrinsic value of $12, what is the strike price of the call?

a. $60
b. $70
c. $72
d. $58

A

d. $58
70-12=$58
Explanation: The intrinsic value ($12) is the difference between the market price ($70) and the strike price, making the strike price $58.

49
Q

Options Trading Calculation:
A customer sells 3 DEF Jan 30 puts at $4 each. What is the total premium received?

a. $90
b. $12
c. $120
d. $30

A

b. $12

$4*3 shares =$12

50
Q

A customer buys 1 LMN Mar 50 call at $7. If LMN stock rises to $60, what is the profit?

a. $700
b. $3
c. $50
d. $10

A

b. $3
50+7= 57
60-57=$3

51
Q

Time Value and In-the-Money Option:
A customer buys 1 PQR Dec 40 call at $8 when the market price is $45. What is the time value?

a. $8
b. $5
c. $3
d. $2

A

c. $3
Explanation: Time value is the difference between the premium ($8) and the intrinsic value ($5), resulting in $3.

52
Q

A customer sells 1 UVW Jan 50 put at $6. What is the break-even price for the option?

a. $50
b. $56
c. $44
d. $46

A

c. $44
Explanation: The break-even price is calculated by subtracting the premium received ($6) from the strike price ($50), resulting in $44.

53
Q

If the premium of an option is $10, and the intrinsic value is $3, what is the time value?
a. $7

b. $13
c. $3
d. $10

A

a. $7
Explanation: Time value is the portion of the premium ($10) not accounted for by intrinsic value ($3), resulting in $7.

54
Q

When does a customer need to sign the Margin/Hypothecation agreement in a margin account?

a. After settlement of the first trade
b. At the time of account opening
c. Before settlement of the first trade
d. After the customer borrows securities

A

c. Before settlement of the first trade -

The customer must sign the Margin/Hypothecation agreement before settlement of the first trade to set terms between the customer and BD.

55
Q

What is the purpose of the Margin/Hypothecation agreement?

a. Set interest rates
b. Define terms between customer and BD
c. Authorize short selling
d. Determine credit limits

A

b. Define terms between customer and BD

  • The Margin/Hypothecation agreement defines the terms of the relationship between the customer and the brokerage firm in a margin account.
56
Q

In a margin account, what does the customer hypothecate as collateral when buying stock on margin?

a. Cash
b. Securities
c. Interest
d. Dividends

A

b. Securities

  • When buying stock on margin, the customer hypothecates (pledges) the margin securities to the brokerage firm as collateral on the loan.
57
Q

What does the Credit agreement in a margin account set?

a. Interest rates
b. Terms and conditions of the loan
c. Securities prices
d. Minimum maintenance margins

A

b. Terms and conditions of the loan

  • The Credit agreement in a margin account sets the terms and conditions of the loan, including interest rates based on the Broker Call Loan Rate.
58
Q

What is the purpose of the Loan consent agreement in a margin account?

a. Authorize short selling
b. Set interest rates
c. Determine credit limits
d. Establish minimum maintenance margins

A

a. Authorize short selling

  • The Loan consent agreement allows the customer’s securities to be lent to another customer for short selling.
59
Q

What is the term for borrowing money in a long margin account?

a. Bullish
b. Short margin
c. Long margin
d. Marginable

A

c. Long margin

  • Long margin accounts involve borrowing money from the brokerage firm.
60
Q

In short margin accounts, customers are borrowing:
a. Money

b. Securities
c. Interest
d. Dividends

A

b. Securities

  • In short margin accounts, customers are borrowing securities to sell them in the hope of profiting from a price decline.
61
Q

Who sets the minimum maintenance margins?

a. Federal Reserve
b. FINRA
c. SEC
d. BDs

A

b. FINRA

  • FINRA sets the minimum maintenance margins, not the Federal Reserve.
62
Q

What type of securities does Regulation T apply to?

a. Nonexempt securities
b. Treasuries
c. Municipal Issues
d. Agency Issues

A

a. Nonexempt securities

  • Regulation T applies to nonexempt securities, excluding Treasuries, Agency Issues, Municipal Issues, and Commercial Paper.
63
Q

What is the purpose of Regulation T in buying on margin?

a. Set minimum maintenance margins
b. Control credit from BD to customer
c. Authorize short selling
d. Determine interest rates

A

b. Control credit from BD to customer -

Regulation T controls the credit from the brokerage firm to the customer in margin transactions.

64
Q

How much can BDs lend based on the price of securities?

a. 25%
b. 50%
c. 75%
d. 100%

A

b. 50%

  • BDs can lend 50% of the price of the securities.
65
Q

If a customer wants to buy $10k worth of stock on margin, how much does the customer need to deposit?

a. $2,000
b. $5,000
c. $7,500
d. $10,000

A

b. $5,000

  • To buy $10k worth of stock on margin, the customer has to deposit $5k.
66
Q

Which securities cannot be purchased on margin?

a. Exchange-listed Securities
b. US government securities
c. Securities selling for less than $5 per share
d. Investment-grade bonds

A

c. Securities selling for less than $5 per share

  • Non-marginable securities include those selling for less than $5 per share.
67
Q

What is the term for securities that can be used as collateral on loans?

a. Marginal securities
b. Non-marginable securities
c. Margin securities
d. Hypothecated securities

A

c. Margin securities

  • Securities that can be used as collateral on loans are referred to as margin securities.
68
Q

What is the initial margin requirement for short accounts according to Regulation T?

a. 25%
b. 30%
c. 50%
d. 75%

A

c. 50%

  • The initial margin requirement for short accounts according to Regulation T is 50%.
69
Q

What happens if a margin account falls below the initial margin but above the minimum maintenance requirement?

a. The account is closed
b. The account is restricted
c. A maintenance call is sent
d. Additional funds must be deposited

A

c. A maintenance call is sent

  • If a margin account falls below the initial margin but above the minimum maintenance requirement, a maintenance call is sent to bring it back to the minimum.
70
Q

What is the minimum maintenance requirement for a long account according to FINRA?

a. 25%
b. 30%
c. 50%
d. 75%

A

A. 25%

  • The minimum maintenance requirement for a long account according to FINRA is 25%.
71
Q

What happens if the equity in a margin account falls below 25% for a long account?

a. A maintenance call is sent
b. The account is restricted
c. The account is closed
d. Additional funds must be deposited

A

a. A maintenance call is sent

  • If the equity in a margin account falls below 25% for a long account, a maintenance call is sent to bring it back to the 25% minimum.
72
Q

When does a customer with a cash account need to pay for a purchase security under Regulation T?

a. T+2
b. T+3
c. T+4
d. T+5

A

c. T+4

  • Under Regulation T, a customer with a cash account can pay for a purchase security no later than T+4.

sie chapter 9-12 (1 decks)

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