Ch 4 - Specialized Options & Ch 5 Option Regulations

Front 1

What are stock index options?

Back 1

options on stock indices that measure the market performance of a specific index and settle in cash

Front 2

What do stock index options give investors the ability to do?

Back 2

profit by anticipating market moves

hedge a diversified portfolio from market (systematic) risk

Front 3

What is the difference between a narrow based index option and a board based index option?

Back 3

Narrow based index options are options on indexes with a narrow range of industries

Broad based index options our options on indexes that cover a wide range of industries like S&P 500, NASDAQ 100 Index, Wilshire 5000 Total Market Index

Front 4

What is a barometer of near-term investor sentiment?

Back 4

CBOE Volatility Index Options - VIX

Front 5

If an investor expects a significant decrease in volatility over the short term with a decline in the market what kind of option should they buy?

Back 5

Buy a VIX call option

Front 6

What does CBOE Volatility Index Option measure to get its market expectations?

Back 6

30 day S&P 500 Index options

Front 7

What type of style are VIX options?
What expiration cycle are they on?
When do they expire?
When is the last day you could close a VIX contract?
When does automatic exercise happen?

Back 7

VIX:
European style
February cycle = FMAN
Wednesday 30 days prior to the 3rd Friday of the calendar month following the expiration month
last day to exercise is the Tuesday before expiration
Automatic exercise = settlement value is equal to or exceeds the strike price on the call

Front 8

Why would someone buy a VIX Call Option?

Back 8

to hedge against the risk of sharply falling stock prices since the VIX moves in the opposite direction of the S&P 500 Index approx 88% of the time

Front 9

How do you determine the contract size of an Index option?

How do you determine the premium?

Back 9

multiply the strike price by a $100

Premium quote X $100

Front 10

On stock index options what intervals are the exercise prices set at?

Back 10

5 pt intervals

Front 11

Index options usually trade and expire on a _______ basis. Most index options expire on the ______ following the ______ friday of the _____ month.

Back 11

Monthly basis

saturday following the 3rd friday of the expiration month

Front 12

for American style index options does the gross or settlement include the premiums?

How do you calculate the settlement on an American style index option?

Back 12

No

exercise price & index value at the close on the day it was exercised difference X $100

Front 13

European style index option settle on the business day following the _______ date.

American style index options settle on the business day following the ______ date.

Back 13

European = expiration

American = exercise

Front 14

Can an exchange that trades index options open the trading of index options even if the trading in the stocks of the underlying index have not begun trading?

Back 14

yes

Front 15

If an investor has a diversified portfolio and thinks the market is:

going to decline they should buy stock index _____

going to rise they should buy stock index ______

Back 15

decline = puts

rise = call

**just like equity options

Front 16

What is market or systematic risk?

Back 16

measures the extent to which an average secuirty responds to changes in the market in general

Front 17

What can effect the index options?

Back 17

changes in price of the indexed securities

interest rates

inflation

Front 18

RAES - Retail Automatic Execution System executes _____ and ______ orders up to _____ contracts for public customers in _____ options or ______ options. **used to be 10 contracts

Back 18

Market and limit orders for up to 50 contracts for OEX or equity options

Front 19

Who offers flex options in what type of securities?

Back 19

CBOE in equity & equity index options

Front 20

What are interest rate or yield based options used to do and by who primarily?

Back 20

Used to hedge against interest rate movements on US Treasury securities and mostly used by bond portfolio managers

Front 21

What style are yield and interest rate options exercised in?

What is the settlement the investor will receive?

Back 21

European, at expiration

settlement will be in cash and will be the difference of the exercise price and the final settle value times $100

Front 22

what is spot yield?

Back 22

where yields are today in the marketplace

Front 23

What are dollar-settled foreign currency options called?
Who are they issued and guaranteed by?
Where are they listed and exchanged?
What time do they trade from (eastern)?
What style are they exercised in?
What is the settlement value?
What is the expiration cycle?

Back 23

World Currency Options
Issued by OCC; traded on Philadelphia stock exchange from 930am to 4pm in ten currencies
exercised in european style on the march expiration style with two additional near term months = 6 months

settlement value = spot price (cash price of current delivery of the currency) of the foreign currency at noon the day before expiration

Front 24

Which foreign currency has a contract size of 1,000,000 units?

How is the strike price determined?

Back 24

japanese yen

take the spot price and move the decimal point to the right 4 digits

.0001=1

ex: strike price 108 yen = .01081

Front 25

If you were going to make a payment in a foreign current to hedge you would buy what? Accept payment?

Back 25

Make payment - Buy calls

Accept payment - Buy Puts

Front 26

When using standardized currency options can you hedge in US dollar options?

Back 26

No

Front 27

As the spot or cash value price of a foreign currency:

Increases - Value of ______ will increase & value of _______ decrease

Decreases - value of puts will ______ & value of calls will _______

Back 27

Increases - calls increase; puts decrease

decreases - puts increase; calls decrease

**this makes sense because remember you will buy a call if the market goes up. so when the spot price increases the market is increasing and more calls are being bought so the value goes up.

when the market goes down you buy puts. so when the spot price goes down the market is going down people buy puts and so the puts value increase

Front 28

What world currency option contracts come in 100,000 units and to get the stike price you move the decimal over 3 digits to the right of the spot price?

Back 28

mexican peso
south african rand
swedish krona

Front 29

What are LEAPS?

Back 29

Long-term Equity AnticiPation Securities - long-term options on stocks and stock indexes

Front 30

What is the difference in the maturities/expirations on index option LEAPS and Equity option LEAPS?

Back 30

Equity = 3+ years from the time they are listed
Index= expire up to 3+ from the time they are listed

Both = saturday following the third friday of the expiration month

Front 31

Most options expire on the saturday following the third friday of the expiration month except?

Back 31

CBOE volatility Inde options

Front 32

Which types of LEAPS are American style? European style?

Back 32

American = Equity & OEX (S&P 100)

European = SPX (S&P 500)

Front 33

What is the difference in settlement in Equity LEAPS versus Index LEAPS?

Back 33

Equity = stock, exercise date + 3 business days

Index = Cash, next business day following exercise date

Front 34

What type of option would provide a hedge for a large portfolio of large-cap equity securities?

Back 34

Buy OEX LEAPS puts

Front 35

Can a LEAP option be purchase on margin? If so what is the margin requirement?

Back 35

Yes.

75% of the premium value

Front 36

What happens to position limits on equity options?

Back 36

short & long term equity options are aggregated (added together) on the same underlying stock

Front 37

Who must approve each customer for options trading? When does this have to be done by, before, at, or after the first option order?

Back 37

must be SPECIFICALLY approved for OPTIONS trading by ROP - REGISTERED OPTIONS PRINCIPAL

PRIOR to the acceptance of the first order

**includes joint tenant

Front 38

If the customers investment objectives change do they need to get reap proved for options trading?

Back 38

YES!

Front 39

If a customer submits writes uncovered what must happen?

Back 39

the ROP - REGISTERED OPTIONS PRINCIPAL must approve the order

Front 40

What is the Option Account Agreement and when must it be submitted?

Back 40

Option Account Agreement = states the customer will abide by the exchange rules and position limits

must be received by the member firm WITHIN 15 CALENDAR DAYS the time the account is APPROVED for options

**not business days!!!!

Front 41

What happens if the customers Option Account Agreement is not submitted within the correct time period and they have an order in?

Back 41

if the agreement is not returned within 15 CALENDAR days of options approval then only liquidating transactions can occur

Front 42

What is the maximum percentage of a persons investment assets that should be committed to option purchases?

Back 42

suitability says 15% - 20%

Front 43

If the member firm does not hear from a customer after requesting verification and/or correction on their customer background and financial information within 15 calendar days what must they do?

Back 43

they can assume the information is correct and verified

Front 44

The order in which actions must be taken when opening a new options account:

I] enter customers order
II] get the securities sales supervises approval (BOM)
III] Obtain a signed options account agreement
IV] Obtain essential facts from the customer

Back 44

IV, II, I, III

Obtain essential facts
get securities sales supervisors approval
enter customers order
obtain a signed options account agreement

Front 45

Which of these actions can you take in a cash account:

1. buy calls & puts
2. writing uncovered calls & puts
3. writing covered call
4. writing covered puts
5. straddles
6. spreads

Back 45

you can

1. buy calls & puts
3. writing covered calls
4. writing covered puts

Front 46

Can you buy options on margin?

Back 46

No
you can buy options IN a margin account but NOT ON margin. 100% of the premium is due except for LEAPS where 75% of the premium is due

Front 47

what is the loan value of an option in a margin account?

Back 47

there is NO LOAN VALUE

Front 48

For covered calls & puts, what is the margin requirement in a margin account?

Back 48

zero

Front 49

Can convertible bonds and warrants be used to cover writing (short) positions in a cash account?

Back 49

No

warrants can be used in a Portfolio Margin Account

Front 50

What type of account uses quantitative models to determine margin requirements based on measuring risk and the effect of hedging?

Back 50

Portfolio margin account

Front 51

Can you trade government securities in a Portfolio Margin account?

Back 51

No

you can trade:

Marginable equity securities
Warrants on marginable securities
equity and index options
securities future products

Front 52

Can a trust account trade options?

Back 52

yes as long as that trust agreement doesn't say it can't and it doesn't interrupt the trusts investment objectives or finical situation or needs

Front 53

For a discretionary account what must every ticket go through?

Back 53

must be approved by and initialed by an ROP on the day it is entered

Front 54

In order for an account to become discretionary what must happen?

Back 54

Written authorization from the client
Written record of approval of the account by the ROP
An ROP other than the one who approved the account must Review the acceptance of the discretionary account and maintain a record of the basis for determination

Front 55

What type of accounts cannot trade uncovered options?

Back 55

cash, IRA, UGMA, pensions

Front 56

What is the document that must be sent to customers at or before they are approved for an options trading account?

Back 56

Options Disclosure Document (ODD) aka Characteristics and Risks of Standardized Options

Front 57

If there are changes to the ODD what must a customer receive?

Back 57

They must be furnished with a revised ODD before their next confirmation is sent

Front 58

In order for an RR to send a standardized option worksheet what must they do? What is the exception?

Back 58

The worksheet must be APPROVED by an ROP and sent preceding or with a ODD - options disclosure document

Distribution to an institutional customer does not require pre-approval unless the member firm elects to require it

Front 59

What does not have to be shown on a customers option confirmation?

Back 59

limit orders
trading volume
open interest

Front 60

How long must written option complaints be kept on file and where?

How long must option communications in general be retained for?

Back 60

at the place of business for 3 years

3 years

Front 61

Prior to the delivery of the ODD what must be submitted to FINRA and how many CALENDAR days prior to first use for approval?

Back 61

ALL advertising , sales literature, and independently prepared reprints sent to PROSPECTIVE customers BEFORE delivery of an ODD must be submitted to FINRA 10 calendar days PRIOR to FIRST!!! use for approval

Front 62

When is the only time correspondence needs to be approved by the ROP?

Back 62

Sent out to 25 or more existing clients within 30 day period and correspondence includes investment RECOMMENDATIONS or PROMOTES SERVICES of the firm

Front 63

Which of the following circumstances require ROP approval?

1. An RR sends out correspondence to 30 existing clients within 30 days that does not include recommendations or promote firm services

2. An RR sends out 10 correspondences to existing clients on April 10 and 20 correspondences to existing clients on May 12

3. An RR send out 25 correspondences within a 30 day period

Back 63

1. No approval
2. No approval
3. approval

Front 64

According to FINRA regulation can a member firm send out communications to a client prior to the delivery of an ODD containing past option performances? method of operation and clearing agencies? Advertising design and devices?

What must it have on the communication?

Back 64

No recommendations or past or projected performances

Yes a brief and general description of options can be included

Yes advertising designs and devices can be included

MUST include contact information