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141 Cards in this Set
- Front
- Back
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What does "short" mean when you are referring to equity options?
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short means you are the seller/selling
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if you were to BUY a CALL and the option was exercised then you will _______ the stock.
Sell a call? |
BUY CALL --> PURSCHASE stock
SELL CALL ---> SELL stock |
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what type of option would you as the investor buy to sell you shares at a set price for a limited period of time?
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BUY PUT ---> SELL stock
SELL PUT ---> BUY stock |
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If you have a long position in an equity option what does that mean?
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you bought the option and are the driver
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How long is a standardized or traditional option contract last for?
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9 months
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What is the most conservative option position an investor can take on? Speculative?
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most conservative = short covered call
most speculative = short uncovered call (loss potential unlimited) |
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If an investor was seeking income or an increased rate of return they would be a _____ of option contracts.
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seller/writer
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An investor seeking maximum profit potential or protection would be a ________ of option contracts
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buyer
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What equity option gives you unlimited profit potential?
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Buy a call
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What equity option would give someone the most downside protection if they were long the stock?
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Buy a put/long put
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What equity option would give someone the most protection if they were short common stock if thought the market was going to rise?
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Buy a call/long call
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can investors sell options to hedge a position?
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No
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Sellers make opening _____ and closing ______.
Buyers make opening ____ and closing _______. |
Sellers = opening sales, closing purchase
buyers = opening purchase, closing sale |
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If you are eliminating or reducing a long position you are what? short position?
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long position = closing sale
short position = closing purchase |
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What is the most that can be lost on when you buy a call? sell a call?
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buy a call = paid premium
sell a call that is uncovered is unlimited |
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Why would an investor write a call?
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the investor would write/sell a call if they thought the market was going to stay neutral or go down in order to make the most of their investment by collecting the premium and if the market goes down selling the stock at the strike price so they do not loose money
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What equity option would be the safest for a person who is retired?
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covered call writing
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How can an investor be covered when call writing?
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1. owning the underlying stock
2. an escrow or depository receipt from the bank 3. a long call with equal or LOWER exercise price that expires AFTER or at the same time as the short **CALLS - Covered A Long Lower Strike |
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Why would you Buy a put?
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you would buy a Put if you thought the market price was going to go down. If it did you would go out into the market and buy it at the lower price and sell it back at the strike price
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If you needed to cover a put writing what position would you take?
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buy a put at an exercise price GREATER or equal to the short which expired either at the same time or after the short
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what is the loss potential on an uncovered put writing?
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strike price less the premium
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how can you be covered put writing?
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1. have funds equal to the strike price
2. bank guarantee letter 3. Long Put with a GREATER/equal strike price |
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What type of security are options classified as?
What does that mean they will be treated as on taxes? |
capital assets
Short term capital gains or losses |
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How do you calculate the break-even price on a Call when buying or selling?
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exercise price + the premium = breakeven on a call
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What is the calculation for the breakeven on a Put?
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exercise price - premium = breakeven on a put
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How would you calculate a breakeven on an option position with a stock position?
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you would use the T-chart setup to calculate the breakeven
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what is the issuer, clearing agency, and guarantor of all listed options in the US?
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OCC - Options Clearing Corporation
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Who owns and runs the OCC?
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OCC is owned and run by its member exchanges that trade options (SROs)
Philidelphia stock exchange (PHLX) Boston stock exchange (BSE) Chicago board options exchange (CBOE) NASDAQ options market (OMX) |
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Are options reported on the consolidation tape?
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NOPEEE
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What is the bid on an option?
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the BID is the price the investor would RECEIVE if they SELL an option (LOWER)
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What is the ask on an equity option?
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the ASK is the price the investor would PAY if they BUY an option (HIGHER)
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What does a quote on an option premium look like on the exchange?
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it has two prices the bid and the ask
BID=RECEIVES=SELL=LOWER ASK=PAYS=BUYS=HIGHER |
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How does the equity options on the exchanges opening of the market for each class look?
What participates in the opening rotation? |
open with the earliest expiration month with the lowest exercise price to the highest
ONLY public market and limit orders participate in the opening rotation |
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What is the Order Book Official (OBO) job and for what exchange?
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OBO is the employee for the CBOE that handles the public limit order book.
they can only accept public order and can NEVER trade for themselves their goal is to make sure that public orders at given prices are executed before any order from the floor at the same or better price |
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What are the two option execution systems?
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CBOE Hybrid
CBOE OSS -routes orders directly to the options trading post -sends notice of execution directly to the broker-dealers office bypassing the communication center on the floor of the exchange |
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When are options ceased trading?
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4pm EASTERN time on the business day PRIOR to expiration
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If trading in a security is halted can options still be traded? exercised?
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security is halted = trading options is halted
customers CAN still exercise |
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When is the exercise cut off time for equity options?
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530pm EASTERN time on the business day PRIOR to the expiration
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When do equity options expire?
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on the saturday following the third Friday
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What is the difference between American style options and European style options?
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American style options - can be exercised ANYTIME after purchased
European style options - can ONLY be exercised at Expiration |
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What makes up a class of options?
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the same type of underlying stock and the same option
IBM calls = a class IBM puts = another class |
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When someone says this is a series of options what do they mean?
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it is the same class of options with the same exercise price and the same expiration month
all IBM Oct 90 calls |
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If a client of yours places an order to buy 100 shares of BCD at a market price of $41 per share and also places an order to sell 1 BCD June 35 call for 7, at what market price will the customer break even?
[A] The customer will break even at a market price of $48 per share. [B] The customer will break even at a market price of $42 per share. [C] The customer will break even at a market price of $34 per share. [D] The customer will break even at a market price of $28 per share. |
C. The customer buys at $41 and sells a call with a premium of 7. B 4,100 - S 700 + Therefore the customer will breakeven at a market price of $34 per share.
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A customer purchased 100 shares of ARK stock at $60 per share. He then purchased one ARK September 80 put at 6. He exercises the put when the market price of ARK stock is $67 and has a:
[A] $1 profit per share. [B] $1 loss per share. [C] $14 profit per share. [D] $14 loss per share. |
C.
Premiums Stock Trans. buys 100 shares of ARK at 60 B - 6,000 purchased 1 ARK Sept 80 put at 6 B - 600 exercises the Sept 80 put S + 8,000 - 600 + 2,000 \ / Total Profit + 1,400 The profit or loss per share is: $14 per share |
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A customer buys 1 XYZ October 70 put at 6 and sells 1 XYZ July 60 put at 2. Which two of the following describe this position?
Debit Spread Credit Spread Bullish Spread Bearish Spread [A] I and III [B] II and IV [C] I and IV [D] II and III |
C.
Premiums Stock Trans. buys 1 XYZ Oct 70 put at 6 B - 600 sells 1 XYZ July 60 put at 2 S + 200 Net Debit - 400 This is a Bearish Spread because the investor buys the option with the higher strike and sells the option with the lower strike. |
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One of your clients is somewhat new to options trading with multiple positions. They understand how options work, but sometimes ask questions in relation to specific positions. They put on the following options position: - Purchase 1 MNO July 50 put for 4 - Sell 1 MNO July 60 put for 11 The client calls in and asks their RR to explain a scenario where this position could lose money. Which of the following describes a scenario where the client will lose money on this position?
[A] The put options both expire and no exercise is made on either contract. [B] The spread between the two contracts narrows and becomes less than 7 points. [C] The spread between the two contracts widens and becomes greater than 7 points. [D] The customer sells the MNO July 50 put for 6 and buys the MNO july 60 put for 10. |
C
When a spread is performed at a "net credit", the investor wants/expects the spread to narrow so that options will expire. Here, the investor sells at 11 and buys at 4 in the initial spread, for a credit of 7 points. Therefore, if this spread widens by more than the net credit (7 points), the investor would lose money on the position. |
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All of the following affect the price of option premiums EXCEPT:
[A] The volatility of the security underlying the option [B] The market price of the underlying security [C] The time remaining until the option expires [D] Position limits |
D.
Position limits regulate the number of contracts on the same side of the market that a customer may own, but they will not have any effect on the premium. |
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What is the time limit for a customer or customers acting in concert for exercising position limits on options on the same side of the market?
[A] 5 consecutive business days. [B] 7 consecutive business days. [C] 30 days. [D] 9 months. |
A.
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When an investor buys 4 ABC August 45 calls @ 3, it is considered to be:
[A] an opening sale [B] an opening purchase [C] a closing sale [D] a closing purchase |
B
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Which of the following options strategies would be best for an investor interested in maintaining his long position in the market while getting maximum down-side protection:
[A] selling covered call [B] selling covered puts [C] buying calls [D] buying puts |
D.
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A customer purchases 1 XYZ July 50 call @ 5. The customer will breakeven at which of the following market prices for the underlying security?
[A] 5 [B] 45 [C] 50 [D] 55 |
D.
50 (call exercise price) + 5 (premium paid) = 55 breakeven |
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A customer would have an unlimited dollar risk if he was:
[A] Short 1 WL Jan 50 put [B] Long 1 WL Jan 50 put [C] Short 1 WL Jan 50 put and short 100 shares of WL stock [D] Short 1 WL Jan 50 put and long 100 shares of WL stock |
C
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The writer of a straddle expects and benefits from:
[A] An increase in the price of the underlying stock [B] A decrease in the price of the underlying stock [C] No significant price movement in the underlying stock in either direction [D] A substantial price movement in the underlying stock in either direction |
C
straddle is the purchase or sale of both a call and a put with the same strike price and expiration date. They are usually bought or sold together. The writer or seller of a straddle expects and benefits from no change or small price changes in the underlying stock. The buyer of the straddle expects and benefits from a large price change in the underlying stock in either direction. |
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In June, a customer buys 100 XYZ at 35 and writes one XYZ November 30 call for 5. This is his first trade in his cash account.
The option will expire on [A] the third Friday of November. [B] the Saturday following the third Friday of November. [C] the last Saturday of November. [D] the last Monday of November. |
B Options expire at 11:59 PM Eastern time on the Saturday following the third Friday of the expiration month.
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A customer buys one ABC Sept 50 put for $2.50 when the price of ABC stock is 60. What is the MAXIMUM profit that the customer may realize?
[A] $250 [B] $4,750 [C] $5,000 [D] Unlimited |
The customer can sell ABC at $50 and if the stock goes down to zero, he will have a profit of $5,000 ($50 x 100 shares). But, he had to pay $250 for the put ($2.50 x 100 shares = 1 contract). Therefore, his maximum net profit is $4,750.
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Susan Smith has a large portfolio of blue chip common stocks and is expecting the market value of her stocks to remain about the same or decline modestly in price and would like to improve the rate of return on her portfolio. Which of the following option positions would be best for her?
[A] Short Calls [B] Long Calls [C] Short Puts [D] Long Puts |
A. Covered Call writing would provide the customer with income and some downside protection which would be the best choice when the customer has a large portfolio of blue chips stocks and is looking for additional income.
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Mr. Smith is the holder of a put option. He instructs his broker to exercise the option. The broker submits the option exercise notice to the Options Clearing Corporation. The OCC would normally:
[A] By using the first-in, first-out method, select another clearing member who is short that series to satisfy the exercise notice. [B] Deliver funds equal to the aggregate exercise price to the exercising holder, Mr. Smith, in exchange for his stock. [C] Assign the responsibility for satisfying the notice to the clearing member which sold the options to Mr. Smith. [D] Randomly select a clearing member who is short that series to satisfy the exercise notice. |
D.
The OCC always uses a random method to select a clearing member to satisfy the exercise notice. The clearing member (Broker/Dealer) then uses either a random method, or the first-in, first-out method. |
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An escrow receipt which is used in option trading is issued by:
[A] The customer [B] The Chicago Board Options Exchange [C] The New York Stock Exchange [D] An OCC approved bank |
D.
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If a customer writes a naked call, which of the following best describes the transaction?
[A] Closing uncovered [B] Closing covered [C] Opening uncovered [D] Opening covered |
C
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An option holder, according to Options Clearing Corp. rules, can exercise the option until:
[A] 4 P.M. Eastern time on the business day that immediately precedes the Saturday of expiration. [B] 5:30 P.M. Eastern time on the business day that immediately precedes the Saturday of expiration. [C] 4 P.M. Eastern time on the last Friday of the expiration month. [D] 11:59 P.M. Eastern time on the Saturday following the third Friday of the expiration month. |
B
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Concerning a call option, it is correct to state that:
[A] It cannot be exercised by the buyer unless he holds a certificate of ownership. [B] A customer usually purchases such an option when he is bearish on the underlying security. [C] When the strike price exceeds the price of the underlying security, the option is in-the-money. [D] The amount of the premium is the maximum amount the buyer can lose. |
D
When buying a call option, the customer believes the price of the stock will increase, meaning he is bullish on the stock. A Call option is in-the-money when the market price is higher than the strike price. Call options allow the holder to buy the stock, so he would need money, not a certificate of ownership to exercise the option. The most the buyer of a call option can lose is the premium paid if the option is not exercised. Investors that buys options do not receive a certificate of ownership. |
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All of the following would cover a put writer in a margin account except:
[A] the underlying stock [B] short the underlying stock [C] long a put with the same or higher strike price [D] cash equal to the aggregate value of the contract |
A
Since the writer of a put would be required to buy the stock being "put" to them, it would not do them any good to own the underlying stock. They would have to come up with the cash required to purchase stock. |
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A customer purchases 1 ABC April 60 put for 8 and sells 1 ABC April 50 put for 1, when ABC stock is selling at $55 per share. What is the maximum profit the customer could realize?
[A] $300 [B] $700 [C] $1,000 [D] $1,300 |
A.
On a spread position, the maximum profit potential is the difference between the strike prices minus the net premium paid. Difference in Strikes (60 - 50 = 10) x Shares Per Contract (100) = $1,000 - Net Premium Paid (700) = $300 Maximum Profit Potential |
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At expiration, if the market price of the underlying stock is the same as the strike price of the option, which of the following positions would result in a profit?
Long call Short call Short call/short put Long call/long put [A] I and III [B] II and IV [C] I and IV [D] II and III |
D
If the market price is the same at the strike price, none of these positions would be exercised, causing the holder (Long) of the option a loss of the amount of the premium paid for the option. The seller of the short positions would keep the premiums received for writing the options, thereby realizing a profit. |
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An investor that thinks the market price of a stock is going to go down and is interested in trading options but wants a position that would limit their loss potential would do which two of the following?
Bullish Bearish Spread Straddle [A] I & III [B] I & IV [C] II & III [D] II & IV |
C. Since the investor expects the market price of stock to go down they would be bearish and since the investor wants to limit their loss potential they would put a spread because a spread is on both sides of the market at the same time the loss potential is limited.
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A customer purchases 1 ABC April 60 put for 8 and sells 1 ABC April 50 put for 1, when ABC stock is selling at $55 per share. What is the maximum loss the customer could sustain?
[A] $300 [B] $700 [C] $4,300 [D] $5,300 |
B
Premiums Stock Trans. purchases 1 ABC April 60 put for 8 B - 800 sells 1 ABC April 50 put for 1 S + 100 Net Debit - 700 The maximum loss potential is the net premium paid, or $700. |
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A customer buys 1 ABC June 60 call @ 1.50 when the market price of ABC is at $57.50. Ignoring commissions and other transaction costs, the customer would breakeven if the market price of the stock were:
[A] $61.50 [B] $59 [C] $45 [D] $58.50 |
A
buys 1 ABC June 60 call @ 1.50 (B - 150) When you by a call you want the market price of the stock to go up. Here it would have to go up by 1-1/2 points the premium paid before the investor would begin to make money. 60.00 + 1.50 = 61.50 Breakeven |
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Intrinsic value for an option is defined as the:
[A] Excess of time premium over the stock's market price. [B] Excess of the total premium over the stock's market price. [C] Profit realized upon closing a position. [D] Difference between the stock's market price and option strike price, if exercise would be profitable to the holder in a long position. |
D
A call is in-the-money when the market price is above the strike price. A put is in-the-money when the market price is below the strike price. Therefore, in-the-money can be defined as the difference between the market and strike prices on a profitable option. |
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If the price of an underlying stock increases substantially, all of the following options positions will be profitable, EXCEPT:
[A] a long call [B] a bull spread [C] uncovered call writing [D] uncovered put writing |
C
If the price of the underlying stock increases substantially, being long a call ( the right to buy at the strike price) will become profitable because it will increase in price, also. But, being short the call (writing the call) will become unprofitable especially when the writer is uncovered and has to buy the stock on the open market at a high price in order to sell it to the option holder at a lower price. |
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A call option is "in-the-money" when the market price of the underlying security is:
[A] The same as the strike price plus the premium. [B] Lower than the strike price. [C] Higher than the strike price. [D] The same as the strike price less the premium. |
C.
Call options are in-the-money when the market price of the underlying security is higher than the strike price of the option. |
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An experienced investor feels that ABC is one of several companies that may face a take-over by XYZ Corporation. The market value of ABC has been appreciating. Based on this information, which of the following option strategies would be the best?
[A] Short Straddle on XYZ Corporation [B] Long Straddle on XYZ Corporation [C] Short Straddle on ABC Corporation [D] Long Straddle on ABC Corporation |
D.
Since the investor expects a big move, either up or down depending on the result of the take-over, the best strategy would be a Long Straddle so that the investor will be there if it goes up or down. |
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Assume a customer buys 100 shares of ABC at $50 per share and buys 1 ABC July 50 put at 3. Which of the following are true?
The investor's potential profit is unlimited. The investor's potential loss is unlimited. The investor's potential loss is limited. The investor's potential profit is limited. [A] I and II [B] III and IV [C] I and III [D] II and IV |
C.
The investor's profit potential is unlimited because the market value of the long stock could increase without end. The loss potential is limited because the purchase of the option gives the investor downside protection. |
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Which of the following is true when the holder of put decides to exercise the put and the broker/dealer sends the exercise notice to the OCC Options Clearing Corporation? The OCC would
[A] forward the exercise notice on a first in first out basis to another clearing member who has a short position that satisfies the exercise notice. [B] randomly choose another clearing member who is short that series to satisfy the exercise notice [C] assign the exercise notice to the clearing member who wrote the option [D] pay the money required to satisfy the exercise price directly to the person who exercised the option |
B.
The OCC will randomly select the another clearing member firm who is short that same series to satisfy the exercise notice |
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A customer writes 10 ABC May 40 calls @ 4.75 when the market price of ABC is $42 per share. What is the customer's maximum loss potential?
[A] $4,750 [B] $40,000 [C] $42,000 [D] Unlimited |
D
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All of the following are advantages to call buyers EXCEPT:
[A] Leverage [B] Hedging [C] Limiting Risk [D] Premium |
D
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A customer buys 100 shares of ABC at 50.50 and sells 1 ABC 50 call @ 5. At what price will the customer breakeven?
[A] $45 [B] $45.50 [C] $55 [D] $55.50 |
B
Premiums Stock Trans. buys 100 shares of ABC at 50.50 B - 5050 sells 1 ABC 50 call @ 5 S + 500 + 500 - 5050 \ / - 4,550 At what price will the customer break even? $45.50 |
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All of the following positions have unlimited loss potential EXCEPT:
[A] short straddle [B] uncovered call [C] uncovered put [D] short stock - short put |
C.
Uncovered short puts have limited loss potential, the exercise price less the premium received. |
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Which of the following influence the premiums of a listed option?
the time remaining until the expiration of the contract. the market price of the underlying stock. the volatility of the underlying stock. interest rates. [A] I only [B] I and II [C] I, II and III [D] I, II, III and IV |
D
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All of the following are TRUE of a covered call writing strategy EXCEPT:
[A] The strategy works best in a bull market. [B] The cost basis of the stock should be considered for tax purposes. [C] The call writer is expecting little change or a fall in the price of the underlying stock. [D] Repurchasing the calls in a closing transaction could lead to a loss. |
A
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An investor who is "bullish" should invest in all of the following EXCEPT:
[A] buy calls [B] buy stock [C] sell naked calls [D] sell naked puts |
C
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A customer wants to buy 4 ABC Jul 50 calls and sell 4 ABC July 55 calls. The Jul 50 calls are quoted at $4-$4.25 and $2.13-$3.33 for the Jul 55 calls. The customer wants to do the trade for $2 or less. This order is known as a:
[A] limit order [B] straddle [C] discretionary order [D] spread |
D.
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Assume a customer buys 1 ABC July 40 call for 4 and sells 1 ABC October 40 call for 7. The customer closes out his positions by purchasing the October 40 call for 9 and selling the July 40 call for 5. What is the profit or loss?
[A] $100 profit [B] $100 loss [C] $200 profit [D] $300 loss |
B.
Premiums Stock Trans. buys 1 ABC July 40 call for 4 B - 400 sells 1 ABC Oct 40 call for 7 S + 700 purchases Oct 40 call for 9 B - 900 sells the July 40 call for 5 S + 500 What is the profit or loss? - 100 |
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An investor would have the greatest upside risk potential with which of the following option positions?
[A] A call spread performed at a credit [B] A put spread performed at a debit [C] A short straddle [D] A long straddle |
C. investor would have to go into the market and buy the stock
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Mr. Smith decides to establish the following option postions
Long 1 ABC Jun 100 Put @ 7 Short 1 ABC June 90 Put @3 This position would be BEST described as which two of the following? I. Credit Spread II. Debit Spread III. Bullish IV. Bearish [A] I & III [B] I & IV [C] II & III [D] II & IV |
D.
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An investor sells stock by exercising a long put, the sales proceeds for tax purposes is equal to which of the following?
[A] The exercise price of the put plus the premium paid for the put. [B] The exercise price of the put minus the premium paid for the put. [C] The difference between the market value of the security and the exercise price of the put. [D] The premium paid to purchase the put. |
B
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A customer buys 100 shares of XYZ at 47 in a cash account and writes 1 XYZ July 40 call at 9. How much must be deposited by the customer into the account?
[A] $1,450 [B] $2,350 [C] $3,800 [D] $4,700 |
C
Premiums Stock Trans. buys 100 shares of XYZ at 47 B - 4,700 writes 1 XYZ July 40 call at 9 S + 900 What is the profit or loss? + 900 - 4,700 \ / How much must be deposited into the account? - 3,800 |
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An investor buys 100 shares of ABC at $47 per share. Later, the investor writes an ABC Aug 50 call at 4. The investor will break even when the underlying stock is at:
[A] $40 [B] $43 [C] $47 [D] $51 |
B
Premiums Stock Trans. buys 100 shares of ABC at $47 per share B - 4,700 writes 1 ABC Aug 50 call at 4 S + 400 + 400 -4,700 \ / the breakeven price would be - 4,300 / 100 shares = $43/share |
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A customer purchases one ABC Jan 45 call at 5 and simultaneously purchases one ABC Jan 45 put at 4. The customer would break even on this strategy when ABC trades at which two of the following prices?
36 45 54 90 [A] I and II [B] I and III [C] II and III [D] III and IV |
B
Premiums Stock Trans. purchases 1 ABC Jan 45 call at 5 B - 500 purchases 1 ABC Jan 45 put at 4 B - 400 Total Premiums paid - 900 Both premiums (9) + Call Strike (45) = 54 Upside Breakeven Both premiums (9) - Put Strike (45) = 36 Downside Breakeven |
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A client performs the following transactions:
Buys 1 ABC Feb 45 Put @ 3 Buys 100 shares of ABC common stock at $45 per share What would the client's maximum profit potential be in this situation? [A] unlimited [B] $4, 800 [C] $4,500 [D] cannot be determined |
A.
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Your customer sells 1 XYZ July 70 call @ 4 after having purchased 100 shares of XYZ @ $65/share. Which of the following represent the tax consequences to your customer?
sale proceeds for tax purposes if exercised of $74/share sale proceeds for tax purposes if exercised of $70/share cost basis of the stock for tax purposes if unexercised of $61/share cost basis of the stock for tax purposes if unexercised of $65/share [A] I and III [B] II and IV [C] I and IV [D] II and III |
C
U.S. tax laws specify that if an option is sold and then expires unexercised, the proceeds of that option are a short-term gain to the investor and the cost basis for the security, if held, remains unchanged. In the event that there is an exercise, the investor has sale proceeds on the exercise of $74 in this scenario, because the stock will be sold at $70 per share and premiums totaling $4 per share were collected. No exercise = no change in cost basis Exercise = increase in sale proceeds by premiums received |
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A customer buys 100 shares of ABC at $62.25 per share and buys 1 ABC Nov 60 put @ 1.5. The stock subsequently rises to $68.50 and the customer lets her put expire and sells the stock in the market. What is the customer's gain or loss?
[A] $425 loss [B] $475 gain [C] $625 loss [D] $625 gain |
B
Premiums Stock Trans. purchases 100 shares of ABC stock at 62.25 B - 6,225 buys 1 ABC Nov 60 put @ 1.50 B - 150 sells the stock in the market at $68.50 S + 6,850 - 150 + 625 \ / What is the customer's gain or loss? + 475 |
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When is the seller of a listed put option entitled to receive a cash dividend?
[A] If the exercise notice is filed with the OCC on or after the ex-date. [B] If the exercise notice is filed with the OCC on or after the record date. [C] If the exercise notice is filed with the OCC just prior to the ex-date. [D] If the exercise notice is filed with the OCC just prior to the record date |
C
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An investor buys 100 shares of ABC stock for $35 a share and simultaneously buys 1 ABC Sept 40 put @ 5. The break even price for the stock at the expiration of the put is:
[A] $5 [B] $30 [C] $35 [D] $40 |
D
Premiums Stock Trans. buys 100 shares of ABC for $35 B - 3,500 buys 1 ABC Sept 40 put @ 5 B - 500 - 500 - 3,500 \ / - 4000 The break even price of the stock is? -4000 / 100 shares = $40 |
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A customer purchases one ABC June 60 put @ 6 and sells one ABC June 50 put at 1. What is the investor's breakeven point?
[A] $50 [B] $54 [C] $55 [D] $57 |
C
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In May, a customer sells an ABC July 40 listed call for a $6 premium and buys an ABC October 40 listed call for a $10 premium. The customer has created a position referred to as which of the following?
[A] Vertical spread or price spread. [B] Diagonal spread. [C] Horizontal spread or calendar spread. [D] Straddle. |
C
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A client sells one XYZ Nov 80 call for 6 and buys one XYZ Nov 60 call for 15 when the price of XYZ is 68.
The break even price of the stock before expiration is: [A] 69 [B] 75 [C] 84 [D] 88 |
Premiums Stock Trans.
sells 1 XYZ Nov 80 call for 6 S + 600 buys 1 XYZ Nov 60 call for 15 B - 1,500 if both expire unexercised, the profit or loss is? - 900 When determining breakeven on a call spread done at a net debit, you take the net debit (-9) and add it to the strike price of the LONG position (Long 1 Nov 60 Call). The break even price would therefore be: 60 + 9 = 69. |
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A customer buys 1 ABC July 60 put @ 7 and sells 1 ABC July 50 put @ 2. What is the customer's maximum loss potential?
[A] $500 [B] $5,500 [C] $6,000 [D] Unlimited |
A
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A customer buys 200 shares of ABC at $35 and sells 2 ABC July 35 calls for $2 each. The customer will have a pre-tax loss on the combined position if the market price at expiration is?
[A] $38 [B] $35 [C] $34 [D] $32 |
D
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A customer writes 1 ABC July 30 put for 4. The maximum loss potential to the customer is?
[A] $400 [B] $2,600 [C] $3,000 [D] $3,400 |
B
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Which of the following positions would cover a short call in a margin account?
Convertible Bond Long the Underlying Stock Long a call with an equal or lower exercise price Escrow Receipt [A] I, II, and IV [B] II and IV [C] II, III, and IV [D] I, II, III, and IV |
D
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All of the following option positions are considered to be bullish except:
[A] long call [B] net debit call spread [C] short put [D] short straddle |
D
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All of the following options positions are bearish except:
[A] the purchase of a put [B] the sale of an uncovered put [C] the sale of an uncovered call [D] net credit call spread |
B
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All of the following option strategies are considered to be bearish except
[A] long put [B] net credit call spread [C] sale of an uncovered put [D] sale of an uncovered call |
C
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If ABC options are trading with expirations for June, July, August, November, what cycle is it on?
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FMAN
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If ABC options is on the 3rd cycle and its september what expirations would be trading?
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Sept, Oct, December, March
JAJO FMAN MJSD |
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How are exercise/strike prices determined? How does the OCC influence them?
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exercise/strike prices are determined by the underlying security on exchanges in an auction market
The OCC influences the strike prices by their system which specifies that strike prices are set at minimum intervals for ex: 2 1/2pt intervals for stocks under $25 5pt intervals for stock above $25 - $200 10pt intervals for stocks over $200 a stock trading at 53, the options might be 50, 55 |
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When would an option contract term be adjusted?
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stock dividends
stock splits right distributions |
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If there is a 2:1 stock split and investor is long 1 ABC Aug 50 call what would happen and when?
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the contract would be adjusted on the EX-DATE to
Long 2 Aug $25 call |
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If a ABC decides to give a stock dividend and the record date is Thursday, August 21, if an investor exercised a call on August 18th who would own the stock dividend? if it was a put option who would own the stock?
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if an option is exercised prior to the ex-date
call = buyer(long) gets dividend put = seller/writer gets dividend |
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If an option contract is bought or sold from the customer to the clearing member(broker/dealer) or from the clearing member to OCC what is the settlement date?
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next business day after trade date
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If you exercise an option when does it settle?
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it settles 3 business days from the time the OCC receives the exercise notice
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What happens at the expiration if the option is in the money by 1 cent or more?
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the OCC will automatically exercise the option for the customer
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Lets say a corporation came to you the RR and wanted to do some option contracts. They did not have any other transactions and wanted sell calls on their stock. what would you do?
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You would tell them you can't.
as a rule you can not sell calls to a corporation for their own underlying stock as an opening transaction |
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When is a call in-the-money? put?
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call = market price is greater then strike price
market price = call strike price = put strike price market price Put = strike price is greater than the market price Call up & put down |
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When the price of the underlying stock is at the money or in the money what will the premium do?
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it will move dollar for dollar with the price of the underlying stock
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What is the time value of an option?
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the amount of premium which exceeds the intrinsic value (the in the money amount of the option)
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What is the spread between 2 option contracts?
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the difference between the premiums
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What is the primary reason to use a spread?
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to limit risk because it puts you on both sides of the market
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What is a horizontal spread?
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a spread that has different expiration months
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What is a vertical spread?
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a spread that has different strike prices and are either bullish or bearish
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What is a diagonal spread?
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a spread that has both different strike and expirations
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How can you tell the difference between a bullish spread or a bearish spread?
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bullish = BUY option with LOWER strike price
SELL option with HIGHER strike price bearish = BUY option with HIGHER strike price SELL option with LOWER strike price **remember covered writing. In call writing we buy a call with a lower strike. when you buy a call you are in the bullish market. Just like in a spread we buy a lower strike. Same thing with the bearish spread where you buy a higher strike when you buy in the bear market to cover a put writing at a higher strike |
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In order to profit in a debit spread what do we want to happen?
What is the max profit & max loss on a debit spread? |
we want the spread to widen by more than the net debit to be profitable.
max profit = the strike prices subtracted from one another minus the net debit = profit max loss = net debit if they expire |
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What do we want a net credit spread to do?
what is the me maximum profit and loss on a net debit spread? |
narrow and/or expire
max profit = net credit if they expire max loss = strike prices subtracted from one another mine the net credit = loss |
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Which of following are done at a net debit? net credit?
Bullish Call Spread Bearish Call Spread Bullish Put Spread Bearish Put Spread |
Bullish Call Spreads & Bearish Put Spread = Net debit
Bullish Put Spread & Bearish Call Spread = Net credit **A bear call & a bull put you are always selling and getting paid for premiums which would be you credit bull calls & bear puts you are buying which is the debit |
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How do you calculate a breakeven on a net debit spread for a call and a put?
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call = Long exercise price + net debit premiums
Put = Long exercise price - net debit premiums |
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What is a straddle? give specifics.
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a straddle is equal number of puts or calls that are either both long or both short on the same stock at the same expiration at the same price
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What is a long straddle? short straddle?
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Long straddle = long call + long put
Short straddle = short call + short put |
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When would you establish a long straddle? short straddle?
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long straddle = major move but doesn't know which direction
short straddle = expect the stock price to remain neutral |
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What is the maximum loss on a long straddle? short straddle?
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long straddle = premiums paid to buy the options
short options = unlimited (as the short call is assumed to be uncovered) never happens but…. *** if its covered then it would be the total premiums + the exercise price of the call - the put exercise price |
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What is the maximum profit on a short straddle? long straddle?
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short = premiums received from shorts
long = unlimited |
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What is a straddle that has different exercise prices and/or different expiration months called?
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combination
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What is the breakeven on a straddle?
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+ call strike = upside breakeven
total premiums - put strike = downside breakeven |
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If the market price of the stock was INSIDE the breakeven points on a straddle or combo what would be profitable a long or short?
If the market price of the stock was OUTSIDE the breakeven points on a straddle of combo which one would be profitable? |
INSIDE = short straddle/combo
OUTSIDE = long straddle/combo |
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For tax purposes what are options treated as?
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capital gains and losses - usually short term
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When does the holding period start for stock purchased when an option is exercised for taxes purposes? what type of options would be exercised?
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when a long call or short put is exercised you buy the stock. the day the option is exercised begins the holding period for tax purposes
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If you are long ABC 60 and you sell a call for ABC 60 and it goes expired what would you put on your taxes?
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the long position cost basis would stay the same
the premium received from the sale would be reported as a short-term capital gain |
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If an investor exercises a long call and obtains a long stock position what would be the cost basis for tax purposes?
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the premium paid + the exercise price
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An investor is long 1 ABC June 30 Put @ 4 and exercises his option what would they report on their taxes?
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capital gain of the exercise price minus the premium paid
30-4= 26 2600 |
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What type of options interrupt the holding period for a stock held by an investor? Why is the holding period interrupted?
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sell a call or buy a put
Anytime an investor locks in a price they can sell a stock whether they do or not the period is interrupted |
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What is the margin required for writing uncovered equity options?
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Market value of stock X 20% plus the premium for the option
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