Simple - If this, then... (Options) Flashcards
If you were to BUY a CALL and the option is exercised, you have to?
BUY the stock.
If you were to SELL a CALL and the option is exercised, you have to?
SELL the stock.
If you were to BUY a PUT and the option is exercised, you have to?
SELL the stock.
If you were to SELL a PUT and the option is exercised, you have to?
BUY the stock.
Buyer’s make opening ___________?
“Opening and Closing Positions”
Opening Purchases (BOP's) "Opening and Closing Positions"
Buyer’s make Closing _________?
“Opening and Closing Positions”
Closing Sales (BCS) "Opening and Closing Positions"
Seller’s make Opening _________?
“Opening and Closing Positions”
Opening Sales (SOS) "Opening and Closing Positions"
Sellers make CLOSING ____________?
“Opening and Closing Positions”
Closing Purchases (SCP's) "Opening and Closing Positions"
Buyer’s make opening ___________? INT
“Opening and Closing Positions”
BOP’s
Buyer’s make Closing _________? INT
“Opening and Closing Positions”
BCS
Seller’s make Opening _________? INT
“Opening and Closing Positions”
SOS
Sellers make CLOSING ____________?
“Opening and Closing Positions”
SCP
When opening a new account what is the order of actions?
[OPENING A NEW ACCOUNT]
a. Obtain essential facts from the customer - GATHER
b. Get the approval of the Securities Sales Supervisor or Branch Manager. - APPROVE
c. Enter customer’s order - ORDER
d. Obtain a signed options agreement - SIGN
GAOS
When opening or setting up a new (brokerage) account: How long does IA have to send background info for customer verification? How long does customer have to resond and verify his info? If there is a change to customers background info or financial info, how long does the brokerage have to notify client (so client can verify)?○
Within 15 days for all.
Broker to client,
client to broker
broker to client as regards a change.
When opening or setting up a new (brokerage) account: How long does IA have to send background info for customer verification?
15 calendar days
When opening or setting up a new (brokerage) account: How long does customer have to resond and verify his info?
15 day OR if no response it’s considered verified.
When opening or setting up a new (brokerage) account: If there is a change to customers background info or financial info, how long does the brokerage have to notify client
15 calendar days
What is an Option’s Aggregate Exercise Price
= SP times # of Units (100 shares) or (SP) x (# of Units)
What is the standardized or traditional duration of an Options contract (or it expires?
9 months
In a cash account, can convertible bonds or warrants be used to cover a writing position a (short position)?
No. Not in a cash acct.
How must an Option client pay in a Cash Acct.?
Must pay in full. (No credit as in a Margin Acct.)
What 4 transactions can a Cash Acct. customer perform?
Buy Calls, OR buy and sell Puts and Calls Only!
Buy Puts,
Sell Calls,
Sell Puts
How do you Hedge a Long position?
with a Long Put
How do you hedge a short position?
with a Long Call. Why? How?
A Long Call will hedge what position?
a Short position (doesn’t own stock needs to be able to buy it for least amount).
A Long Put will hedge what position?
a Long position (Owns the stock needs to protect it from loss of value).
A Bullish investor will either Buy ____ or sell _____?
Buy Calls or Sell Puts
A Bearish investor will either Buy ____ or Sell____?
Buy Puts or Sell Calls
What do investors buy when the are looking for MAXIMUM profit potential?
Buy a Call or buy a Put
What do investors Buy or Sell when they are looking for INCOME?
Sell options Calls or Puts
What is a trade rotation?
Upon the opening of the market, as soon as the stock opens, each class of options will open sequentially from the earliest expiration month with the lowest exercise price out to the highest.
What or who is the Order Book Official (OBO)?
OBO is an employee of the exchange who handles the public limit order book. The can only accept publick orders and cannot trade for themselves.
KEY TAKEAWAYS
An order book official is an exchange employee that maintains a list of public orders for a specific option class.
An OBO does not trade their own account. They maintain and execute public orders.
Market makers are the one that must trade their own accounts and post regular bids and offers. This is a different role than the OBO.
What is a Market-maker?
A broker dealer who is prepared to buy orsell a specific security (such as a bondor at least one round lot of a stock) ata publicly quoted price is called amarket maker in that security only.
What is the CBOL Hybrid?
a trading engine that blends the trading floor technology with an electronic trading platform.
What is the CBOE OSS?
The Order Operating System that electronically
a. Routes orders directly to the options trading post
b. Sends notice of the order execution directly to the B/D’s office bypassing the communication center on the floor of the exchange.
What time etc. does trading cease on the Option exchange?
4pm Eastern Time on the 3rd Friday of the expiration month
If trading in a security is on the option exchange is halted, what happens to trading on the option?
Trading on the option is halted.
If trading in the option is halted, can investors still exercise the Option?
Yes, they can still exercise the option.
When is Exercise Cut Off Time for Options?
- 5:30 pm Eastern Time on the 3rd Friday of the expiration month.
Which side of the market are Long Calls & Short Puts?
Bullish.
Which side of the market are Long Puts and Short Calls?
Bearish.
What are the 3 standard Option Cycles (Expiration dates)?
1- JAJO 2- FMAN 3- MJSD
Do a stock split on: Long 1 ABC Aug 50 Call when ABC splits 4:1
- Take the number of shares (100) and set up the first fractions…
100/1 x 4/1 = 400 - Set up your 2nd set of fractions BUT., invert the split ratio and multiply by the price of shares …
1/4 x 50/1 = 12.5
Result: after split, you have 400 shares at $12.50 per share.
Proofing the result:
1. Take the original price of shares and multiply by the number of shares…
$50 x 100 = $5,000
- Take the new amount of shares (400) and multiply that by the new price of the shares ($12.50)…
400 x $12.50 = $5,000
When an Call option is exercised prior to the ex-date who owns the stock?
The Buyer.
When a Put option is exercised prior to the ex-date who owns the stock?
Seller
When an Option is exercised who (what agency) is notified?
the OCC
What is intrinsic value on a Call Option?
When the market price of the stock ia greater that the exercise price (SP) of the Option.
What is a Vertical spread?
Two Options (Buy & Sell) with different SP’s.
What is a Horizontal or Calendar Spread?
Two options (buy & sell) with different expiration dates. i.e. Sep and Oct.
What is a Diagonal Spread?
Two options with both different SP’s and expiration dates.
What does the seller of a put do if an option is exercised?
Has to BUY the stock.
What does the Buyer of a put do if an option is exercised?
Sell the stock
What does the seller of a call do if an option is exercised?
sell the stock
What does the buyer of a call do if an option is exercised?
buy the stock
LONG PUTS protect or hedge?
long stock positions
LONG CALLS protect or hedge?
short stock positions
a. Buyers make:
i. _________ purchases
ii. ________ Sales
i. Opening purchases
ii. Closing Sales
Sellers make:
____________ Sales
ii._________ purchases
i.
Opening Sales
Closing purchases
What does a break even point signify? What does it indicate or gauge?
The point at which the stock must rise (or fall) to before it becomes profitable. At this price (SP - or + premium) the option becomes profitable (in the money).
How do you calculate the B/E of a call?
Formula: SP + Premium (Whether buying or selling a call).
How do you calculate the B/E of a Put?
Formula: SP - Premium (Whether buying or selling a Put).
Investors who are Bullish will either
1) buy calls or sell puts or
2) buy puts or sell calls?
Buy Calls or Sell Puts
Investors who are Bearish will either:
1) buy calls or sell puts or
2) buy puts or sell calls?
buy puts or sell calls
What is the name of the issuer, clearing agency and guarantor of ALL listed options in the U.S.?
OCC or Options Clearing Corporation -
Under whose jurisdiction is the OCC which clears transactions for Put and Call Options for common stocks and other securities.
The SEC.
Who runs the OCC?
The OCC is run by the exchanges that are members of the Options exchange. These exchanges are SRO’s and include:
1. Philadelphia Stock Exchange - PHLX 2. Boston Stock Exchange - BSE 3. American Stock Exchange - AMEX 4. Chicago Board of Options Exchange – CBOE 5. NYSE-Euronext – NYX 6. International Securities Exchange - ISE 7. NASDAQ Options Market – OMX
Are Option trades reported on the consolidated tape?(Also known as ticker tape)
No, they are not.
What two prices does an option quote have?
Bid and Ask prices.
What is the bid price of an option represent to the investor?
Bid is the price the investor would receive if they sell the option. (Lower)
What is the ask price of an option represent to the investor?
Ask is the price the investor pays if they buy the option (Higher)
What is the Option Trading Rotation?
Upon the opening of the market, as soon as the stock opens, each class of options will open sequentially from the earliest expiration month with the lowest exercise price out to the highest.
What is the sequence of opening for the Option Trading Rotation
From the earliest expiration month with the lowest exercise price out to the highest. (Looks like lower to higher).
What is a covered call?
An investor selling call options (the Right to buy a stock at a predetermined price) owns an equivalent amount of the underlying security. To execute this an investor holding along positionin anassetthen writes (sells) call options on thatsameasset to generate an income stream. The investor’s long position in the assetis the “cover” because it means the seller can deliver the shares if the buyer of the call option chooses to exercise.
What is a covered put?
The investor: a. Has funds / investor has the money equal to the aggregate exercise price (on deposit).
b. Has a Bank Guarantee Letter, and bank will guarantee the investor has the money to "cover" the cost of the stock should the Option be exercised. c. The investor is Long a Put with an equal or greater exercise price (strike price, then the short Put) and the short Put must expire at the same time or before the long (Put)
What is the OBO? What does he/she do?
OBO the Order Book Official
An order book official is anexchange employee that maintains a list of public orders for a specific option class. An OBO does not trade their own account. They maintain and execute public orders.
What is a market maker?
A broker dealer who is prepared to buy orsell a specific security ata publicly quoted price (called amarket maker in that security only).
Brokers buy or sell specific securitiesthrough market makers who may maintaininventories of those securities. There isoften more than one market maker in aparticular security and they bid againsteach other helping to keep themarketplace liquid the stock market andthe corporate and municipal bond marketsour market maker markets in contrast onthe floor of the New York Stock Exchange there’s a single specialist to handle transactions in each security. Market makers must be compensated for the risk they take. What if he buys your shares in IBM then IBM stock price begins to fall before a willing buyer has purchased the shares. To prevent this the market maker maintains a spread on each stock he covers.
What are position limits?
The OCC limits the maximum number of option contracts an investor can maintain in the account at one time when options are on the same stock and on the same side of the market. Generally concern large institutional investors and hedge funds.
LONG CALLS & SHORT PUTS on the SAME SIDE OF THE MARKET are a) Bullish or b) Bearish?
Bullish
LONG PUTS & SHORT CALLS = SAME SIDE OF THE MARKET are known as a) Bullish or b) Bearish?
Bearish
What are Exercise Limits?
Limited number of option contracts which can be exercised in any consecutive 5 business day period.
What option style can be exercised an any time (after purchase).
American Style Options
What option style can only be exercised at expiration (hedging).
European Style Options
What is a class of option(s)?
Options of the same (Put or Call) type on the same underlying stock (IBM) are called a Class (of Options.
What is the Option expiration cycle for January or Cycle #1?
Cycle 1 JAJO - Jan (1,2,3,4) April (1,2,3,4) July (1,2,3,4) October (1,2,3,4 back to Jan).
What is the Option expiration cycle for Feb. or Cycle #2?
FMAN 0r Feb. May, Aug., Nov
What is the Option expiration cycle for March or Cycle #3?
MJSD or Mar., June, Sept., Dec.
How is the Premium for an option determined? How is the price/cost determined?
Option premiums are not determined by the OCC. They are determined by supply and demand in the market.
How is the Strike Price (SP) or Exercise Price determined or arrived at?
Exercise / Strike price - determined by the price of the underlying security on exchanges in an auction market. NOT by the OCC.
What adjustment effect the number of shares as well as number of option contracts as to the number of shares an investor owns?
Stock dividends
Stock splits
Rights distributions
Are listed Options adjusted for Cash Dividends?
Listed Options are NOT adjusted for Cash Dividends.
What is the procedure (formula) to calculate an adjustment to an option when there is a stock split?
When a stock dividend or stock split occurs, the Option is adjusted to reflect the change in the number of shares recalculated.
○ With a stock split there is also a change in the strike price (SP) of the Option.
Stock Split Example: Long 1 ABC Aug 50 Call when ABC splits 2:1
1. Set up fractions
2. Multiply the fractions to get new number of shares.
2/1 X 100/1 = 200 shares which will create 2 options 3. Multiply number of shares (100) times $50 (the SP) = $5,000 4. Divide the new number of shares (200) into the dollar amount of the stock i.e., you have the same cost for the shares, just a new (reworked) amount of shares from 100 to 200 (or the 2:1 split). 100 shares x $50 = $5000 divided by 200 shares = $25 nnew share price.
What is the procedure (formula) to calculate an adjustment to an option when there is a stock dividend?
Stock Dividend Example: Long 1 ABC Dec 60 Calls @ 6 when ABC declares a 50% stock dividend (a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). How many shares will the option represent after the stock dividend?
1 contract = 100 shares
100 shares x .50 (50%) = 50 additional shares
50 shares added to the original 100 shares = 150 share value per contract.
Stock Price = (60 x 100 = 6,000 ) divided by 150 shares = $40 new strike price
New equation: Long 1 ABC Dec 40 Call covering 150 shares
Who is entitled to the dividend? Exercising a Call prior to the ex-date?
—-> the Buyer is entitled to the dividend (Maybe just because it’s a Call. Call + Put - ) CALL UP, PUT DOWN!
Who is entitled to the dividend? Exercising a Put prior to the ex-date?
—-> the assigned put writer (seller of the Put) gets the dividend because the writer will then own the stock. (Once the Put is exercised, the writer “owns” the stock.
With option settlements (when the transaction is fully completed) what is the length of time when it’s done between a customer and his broker-dealer?
(when an option is bought or sold)—->
next business day after the trade.
With option settlements (when the transaction is fully completed) what is the length of time when it’s done Under Reg T (Margin accts.)?
Buying on Margin
—–> Liquidation on the 4th day.
With option settlements (when the transaction is fully completed) what is the length of time when it’s done Clearing Member (or B/D) to OCC?
—–> next business day after the trade.
With option settlements (when the transaction is fully completed) what is the length of time when it’s an Exercise (an option)? (Exercise the Put or Call)?
Settles 2 business days OCC receives exercise notice.
What Is Regulation T?
A collection of provisions that govern investors’ cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase ofsecurities.
What is a collection of provisions that govern investors’ cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase ofsecurities?
Regulation T
According to Regulation T, what percent of the purchase price of securities can be bought using a loan from a broker or dealer?
An investor may borrow up to 50% of the purchase price of securities that can be bought using a loan from abrokeror dealer.
In a Reg T margin account, how is the remaining amount after the loan by the broker-dealer funded?
The customer must put up 50% in cash?
