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20 Cards in this Set
- Front
- Back
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Who is specifically responsible for a firm's compliance program for options activities?
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The Registered Options Principal (ROP)
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What does the Options Clearing Corporation do?
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The OCC manages all options activities and ultimately issue all options trades
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What are the events for opening an options account?
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Gather info on the Options Account Agreement and send copy and disclosure agreement to customer at or prior to account approval Obtain an ROP's account approval for trading Allow client to trade Obtain options account agreement with customer's signature within 15 days of account approval |
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For what type of options transaction are further requirements required from a firm?
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For uncovered options writers because of the massive risk involved
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Listed Options are options which...
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are traded on an exchange like the CBOE or ISE
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What increments are options bids sold in?
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Typically in $.05 increments but sometimes in $.01 increments
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For a listed option, before an order may be executed the order ticket must include:
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Whether buy/sell order Whether position is naked or covered Number of options contracts Name of underlying stock Expiration month and exercise price Whether order is for call/put Terms of the order (market, limit, stop) Opening or closing transaction (open new position or close existing one) |
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When placing an order for a complex strategy (spread or straddle) what does the buyer/seller need to specify?
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The seller must specify a minimum net premium to accept while the buyer must specify a maximum net premium to pay
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How do position limits on options trading work? |
Typically stocks will have a position limit for one side of the market i.e. the customer cannot purchase more than 75,000 long calls and short puts because they are both bullish
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Deadlines for Standardized Option Contracts
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All equity options expire at 11:59 PM on the third Friday of the expiration month. An expiring option will stop trading at 4:00 PM ET that day, and a buyer must express intent to exercise the option by 5:30 PM
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How does the OCC exercise an option after receiving notice from a purchaser? |
The OCC will randomly assign the exercise notice to a B-D whose account shows an opposite position. If the B-D receives the notice, they must select a client using FIFO, random selection, or some other fair and equitable assignment
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Equity options trade settle... |
on the next business day following the trade but the settlement of an exercised options occurs in three business days
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Non-Equity Option Expiration
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Stock Index and Foreign Currency options expire at 11:59 as do equiy options, narrow-based index options cease trading at 4 PM and broad-based index options cease trading at 4:15 PM
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Long Term Equity Anticipation Securities (LEAPS)
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Equity options with expirations of up to 39 months and are beneficial because they lose their time value at a slower pace so they provide a longer term opportunity to hold an option
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Adjusting Options for Splits/Dividends
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Even Split: # of Contracts increase, shares unchanged, strike price decreases Odd Split: # of Contracts unchanged, shares increase, strike price decreases Stock Dividend: Contracts unchanged, # of shares increase, strike price decreases Cash Dividend: Nothing changes |
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How does taxation work when an option expires?
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The premium represents a short-term capital gain/loss
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Liquidation of Options for tax purposes
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There is a capital gain or loss depending upon whether the closing activity made/lost money
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Taxation for Exercised Options
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Ignore the amount of money made, taxation is placed against the cost basis for that stock. For instance, when exercising a call you calculate the cost of purchasing the stock and the premium, ignoring the gain until that next sale is made
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Holding Period for Acquired Shares for tax purposes
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The holding period begins when the option is exercised and the stock transaction settles. There is no credit given during the time someone owned the actual option |
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Hedging Taxation Rules
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Hedge bought on same day as stock is included in cost basis Puts bought after day one but before a year stop the holding period since buyers cannot hedge stocks before they become long-term Long-term stocks that are hedged do not affect holding periods since it is already long-term |
