Equity Options - Practice Quiz
Under option exchange rules, when must a customer's options account be approved by a registered principal? A) Before entering the first options order B) By the settlement date of the first options order C) Within 10 days from the time the account was approved for options trading D) Within 15 days from the time the account was approved for options trading
A) Before entering the first options order Option accounts must be approved by a registered principal (S9 or S4 registered person) before the first trade is placed in the account. The completed options account agreement does not need to be received by the member firm from the client until 15 days from the time the account was approved for options trading.
You are an RR at a firm and one of your customers calls you up and informs you that she wishes to exercise a long listed option that she currently holds. To whom would your firm present such an exercise order? A) Your firm would present the order to the OCC (Options Clearing Corporation). B) Your firm would present the order to a holder of the short option in the same underlying security to be selected on a random basis. C) Your firm would present the order to the investor who wrote the option contract. D) Your firm would present the order to any broker-dealer not associated with your firm.
A) Your firm would present the order to the OCC (Options Clearing Corporation). The OCC is the issuer and guarantor of all listed options. The exercise would be presented to the OCC and the OCC would then randomly choose a broker-dealer to whom the exercise notice would be assigned.
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) $2,600 writes 1 ABC July 30 put for 4 exercise the July 30 put Premiums | StockTrans S +400 | B - 3,000 = - 2,600
A trader writes 10 uncovered ABC June 50 calls at 4.75 when ABC stock is trading at 45. If the trader closes out their option position at 2.15 what is her gain? A) $2,150 B) $2,600 C) $3,000 D) $4,750
B) $2,600 writes 10 uncovered ABC June 50 calls at 4.75 closes (buys) 10 ABC June 50 calls at 2.15 What is her gain? Premiums | Stock Trans S +4,750 B - 2,150 + 2,600
A customer buys 100 shares of XYZ at $40/share and sells 1 XYZ Dec 40 call @ 2. What is the maximum loss potential? A) $200 B) $3,800 C) $4,000 D) Unlimited
B) $3,800 Buys 100 XYZ @40 Sells 1 XYZ Dec 40 Call@2 B -4,000 S + 200 = $ - 3,800
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) $475 gain purchases 100 shares of ABC stock at 62.25 buys 1 ABC Nov 60 put @ 1.50 Sells the stock in the market at $68.50 Premiums | Stock Trans. B -150 | B- 6,225 S + 6,850 = +475
An investor who is short a call option on ABC and wants to offset the position would enter: A) an opening sale B) a closing purchase C) a closing sale D) an opening purchase
B) a closing purchase When an investor is short a call to close the position, they make a closing (to eliminate) purchase.
An option trader writes 5 June 255 calls at 3 and 5 June 245 puts at 2. If the trader later repurchases the calls at 4 and the puts expire worthless, the trader's profit or loss will be: A) $100 profit B) $100 loss C) $500 profit D) $500 loss
C) $500 profit writes 5 June 255 calls at 3 writes 5 June 245 puts at 2 repurchases the call at 4 the trader's profit or loss will be: Premiums | Stock Trans. S +1,500 S +1,000 B -2,000 = +500
An investor can trade Foreign Currency Options on all of the following EXCEPT: A) Euro B) Swiss Francs C) American Dollars D) Japanese Yen
C) American Dollars Here in the U.S. we do not trade our own currency. Foreign currencies are traded here in the U.S.
What is the maximum risk for the buyer of a call option on a stock index? A) The strike price less the premium. B) The strike price plus the premium. C) The premium paid. D) The premium paid plus the out of the money amount.
C) The premium paid. The most you can lose(risk) when you purchase an option is the premium paid.
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) $32 buys 200 shares of ABC at $35 sells 2 ABC July 35 calls for $2 Premiums | Stock Trans. S +400 | B - 7,000 = -6,600 6,600 / 200 shares = $33 per share breakeven Therefore, since breakeven is $33 per share, the customer would have a loss if the market price of the stock was below the breakeven price (32).
The option premium is the A) expiration date of the option. B) price at which the option can be exercised. C) profit generated on the option. D) cost of the option to the buyer.
D) cost of the option to the buyer. The option premium is the price the buyer pays to purchase the option.
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] Randomly select a clearing member who is short that series to satisfy the exercise notice. 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.
A customer buys 1 XYZ October 50 call at 3. He later exercises the option when XYZ is selling at $60 per share. The cost basis of the 100 shares for Federal tax purposes is? A) $4,700 B) $5,000 C) $5,300 D) $6,000
C) $5,300 buys 1 XYZ Oct 50 call at 3 exercises the 50 call B - 300 B - 5,000 = 5,300
Option contracts can be "in-the-money", "at-the-money", or "out-of-the-money". Of the following, which is "in-the-money"? A) A put contract with a strike price that is lower than the market price of the underlying common stock. B) A put contract with a strike price that is equal to the market price of the underlying common stock. C) A call contract with a strike price that is higher than the market price of the underlying common stock. D) A call contract with a strike price that is lower than the market price of the underlying common stock.
C) A call contract with a strike price that is higher than the market price of the underlying common stock. A call contract is "in-the-money" when the strike price on the contract is lower than the current market price. Another way of saying this is that a call is "in-the-money" when the market price exceeds the strike price on the contract. A put contract is "in-the-money" when the strike price on the contract is higher than the current market price. Another way of saying this is that the put is "in-the-money" when the market price is lower than the strike price on the contract.
A put writer would be "covered" by: A) A long call B) Another short put C) Cash equal to the strike price multiplied by 100 shares D) An escrow receipt for 100 shares of the underlying stock
C) Cash equal to the strike price multiplied by 100 shares A covered put option gives the investors the obligation to Buy. The writer (short) needs to have sufficient cash on deposit, have long equivalent put, or have a bank guarantee letter to "cover" the put if exercised by the holder.
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) Higher than the strike price Call options are in-the-money when the market price of the underlying security is higher than the strike price of the option.
An investor is looking for maximum profit potential and is bearish on ABC. Which of the following option positions would be best for this investor? A) Long Calls B) Short Puts C) Long Puts D) Short Calls
C) Long Puts Long Puts would be the best choice for a bearish investor because when an investor buys a Put they have profit potential all the way down to zero.
A customer buys 100 shares of XYZ at $60 per share and buys 1 XYZ October 60 put at 4. Which of the following statements is true? A) Maximum Profit - $400; Maximum Loss - $5,600 B) Maximum Profit - $5,600; Maximum Loss - $6,400 C) Maximum Profit - Unlimited; Maximum Loss - $400 D) Maximum Profit - $6,400; Maximum Loss - Unlimited
C) Maximum Profit - Unlimited; Maximum Loss - $400 The profit would be unlimited because you would be long the stock and the loss would be limited to the premium paid to buy the put ($400). By buying the put, you lock in a price (60) at which you could sell the stock.
All of the following cover the sale of a call option under option exchange rules EXCEPT: A) 100 shares of the underlying security B) A depository or escrow receipt for 100 shares of the underlying security C) One convertible bond that converts to 50 shares of the underlying stock D) A long call option with an equal or lower strike price
C) One convertible bond that converts to 50 shares of the underlying stock Remember that a standard/traditional option contract is for 100 shares of the underlying security, so coverage with a convertible bond that converts to 50 shares would require two of the bonds.
In which of the following cases is an RR prohibited from selling a call option? A) The RR has trading authority in a client's account. B) The client owns 5% of the stock of the underlying company. C) The RR receives the order from a corporate client who issued the underlying stock. D) An investment adviser for the client, who has third party trading authority, enters the order.
C) The RR receives the order from a corporate client who issued the underlying stock. Call options may not be sold by the corporation that issued the underlying stock. Selling call options implies the belief that the security will not increase in market value and the issuing corporation has insider knowledge related to the financial condition of the entity. In each of the other scenarios, the RR is permitted to sell the call option.
A client effects the following transactions: Buys 100 shares of QRS at $30 per share Buys 1 QRS April 40 put at 3 The client exercises the option after substantial market declines in QRS. What is the tax consequence to the client? A) The client has a $300 loss. B) The client has a $1000 profit. C) The client has a $700 profit. D) The client has a $1,300 loss.
C) The client has a $700 profit. Buys 100 shares of QRSs at $30 per share Buys 1 QRS April 40 put a 3 exercises the 40 put Premiums | Stock Trans B -300 | B - 3,000 | S + 4,000 -300 | +1,000 =700 profit
If a client or 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 will break even at a market price of $34 per share. The customer buys at $41 and sells a call with a premium of 7. 41 - 7 = 34 per share
Which of the following investment strategies is BEST suited for an investor who believes that the market will have large amounts of volatility in the coming months, but that despite the volatility, the market will remain stable or only go down slightly? A) The investor should sell short the SPY ETF. B) The investor should purchase the SPY ETF. C) The investor should purchase call option on VIX. D) The investor should purchase an index fund for the NYSE.
C) The investor should purchase call option on VIX. VIX options are a barometer of near-term investor sentiment. VIX stands for Volatility Index Options. The VIX moves in the opposite direction of the S&P 500 approximately 88% of the time, so this investor should buy VIX call options since they will appreciate with a decrease in market value, and since the volatility may increase their value.
Which of the following statement is true of the buyer of a call option? A) The maximum profit and loss is limited. B) The profit potential and maximum loss is unlimited. C) The profit potential is unlimited and the maximum loss is limited. D) The profit potential is limited and the maximum loss is unlimited.
C) The profit potential is unlimited and the maximum loss is limited. Profit potential is unlimited when buying a call because the investor wants the market price of the stock to go up. When buying a call, the most one can lose is the premium paid for the option.
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 initial option order must be written as an opening A) sale uncovered. B) purchase uncovered. C) sale covered. D) purchase covered.
C) sale covered. The initial option order would be an opening -Sale: because he is selling (writer) the option -Covered: because he owns the underlying stock
All of the following investment strategies are considered to be bearish except A) long put option B) short selling stock C) sale of an uncovered put option D) sale of an uncovered call option
C) sale of an uncovered put option The sale of put - covered or uncovered is on the bullish side of the market.
What is the maximum loss potential for a customer that is long a put option on a debt security? A) the difference between the strike price and the market price B) the difference between the strike price and zero C) the premiums paid at the time the contract was purchased D) Unlimited
C) the premiums paid at the time the contract was purchased When you purchase an option (put or call), the most you can lose is the premium paid to buy.
A customer buys 200 shares of XYZ at $35 per share and buys 2 XYZ July 35 puts for 3 each. The customer will have a pre-tax profit at what market price for the stock? A) $31 B) $35 C) $36 D) $39
D) $39 buys 200 shares of XYZ at $35 per share buys 2 XYZ July 35 puts for 3 each Premiums | Stock Trans. B -600 B -7,000 -7,600 / 200 = $38 break even Since $38 is the breakeven, the customer would realize a profit at $39.
One of your clients regularly trades options. The customer feels that QRS is going to remain relatively stable or have a slight downturn and he decides to sell 1 QRS May 55 call for $2.50 when QRS is at $54.50. About a month later, the customer receives an exercise notice when QRS is trading at $60.75 per share. In terms of the exercise, what price will the client report for tax purposes in relation to the price at which the stock is sold to the buyer of the call? A) $52.50 per share B) $54.50 per share C) $57.00 per share D) $57.50 per share
D) $57.50 per share The premium received from the sale of the call is $2.50. This amount is added to the strike price in terms of overall proceeds on the transaction. The strike price is $55 per share, so the total sale amount will be $57.50 per share in proceeds. The customer will have a loss if the sale was uncovered, because the customer will be forced to buy at $60.75. Covered vs uncovered is not specified in the question.
In which of the following scenarios is a registered representative (RR) PROHIBITED from selling a call option for a client? A) An RR with discretionary authority over a client's account places an order to sell a call against securities held in the client's portfolio. B) An institutional client instructs the RR to sell a call against a 5% position in the underlying stock. C) An RR receives an order from an Investment Adviser with third party trading authorization to sell calls in a client's account. D) A corporate client instructs the RR to sell a call against company stock.
D) A corporate client instructs the RR to sell a call against company stock. Corporations can never sell call options or buy put options on their own securities.
At what time must a firm provide an Option Disclosure Document (ODD) to a customer? A) Within one business day of the first options trade in the account. B) No later than 2 business days after the first options trade in the account. C) No later than 15 business days after receiving the customer's account application. D) At or before the approval of the account for options trading.
D) At or before the approval of the account for options trading. Options regulations specify that an Options Disclosure Document (ODD) must be delivered to a customer at or prior to the time that the customer's account is approved for options transactions.
All of the following are advantages to call buyers EXCEPT: A) Leverage B) Hedging C) Limiting Risk D) Premium
D) Premium Paying a premium is not advantageous to the buyer of an option.
Although a new options account was approved for options trading by the firm's registered options principal on July 10, on July 26, the customer still ahs failed to return a signed options agreement. Which of the following is correct regarding the account? A) All of the open options positions should be liquidated. B) An extension should be requested from the OCC. C) The customer's account should be frozen for a 90-day period. D) The customer should be allowed to close existing options positions, but not open any new options positions.
D) The customer should be allowed to close existing options positions, but not open any new options positions. Should the client fail to return a signed options agreement, the account would be allowed to close existing positions, but would not be allowed to open any new ones.
One of your clients has a long-term holding in BCD Corporation's common stock. The client anticipates that there will be no substantial movement in the market value of BCD in the near future. The client wants to bring in some additional funds on top of their retirement plan distributions. With the above information in mind, which of the following would be the MOST appropriate way to accomplish this goal? A) The customer should start selling put options on BCD Corporation Stock. B) The customer should start buying put options on BCD Corporation Stock. C) The customer should start buying call options on BCD Corporation Stock. D) The customer should start selling call options on BCD Corporation Stock.
D) The customer should start selling call options on BCD Corporation Stock. Since the customer owns BCD stock already and expects no substantial movement in BCD stock, a conservative way to generate income from options premiums would be to sell call options on BCD. This would mean that the investor was selling covered calls.
An investor with a large portfolio of blue-chip stocks has written call options on the stock to increase income in their account. If this investor offsets the options, which of the following is TRUE? A) The investor has made an opening sale. B) The investor has made a closing sale. C) The investor has made an opening purchase. D) The investor has made a closing purchase.
D) The investor has made a closing purchase. In this question, the first thing the investor did was an "Opening Sale" because they sold calls against their portfolio for the additional income and now they are going to eliminate those Calls by buying them back in the market and making "Closing Purchase" transactions.
An investor buys a call option on a common stock. Theoretically, what is the MOST that the investor could gain on this investment? A) The premium paid for the option. B) The difference between the strike price and the market value of the security at purchase. C) The option's strike price minus premiums paid for the call option. D) The potential gain is unlimited.
D) The potential gain is unlimited. When an investor buys a call option they expect the market price of the stock to go up. Since there is no limit as to the possible appreciation of the underlying stock, the profit potential is unlimited on a purchase call.
An investor buys a call option on a common stock. Theoretically, what is the MOST that the investor could gain on this investment? A) The premium paid for the option. B) The difference between the strike price and the market value of the security at purchase. C) The option's strike price minus premiums paid for the call option. D) The potential gain is unlimited.
D) The potential gain is unlimited. When an investor buys a call option they expect the market price of the stock to go up. Since there is no limit as to the possible appreciation of the underlying stock, the profit potential is unlimited on a purchase call. The answer would not be the difference between the strike price and the market value, because this does not take into consideration the premiums paid, or the possible appreciation of the underlying securities prior to expiration of the call option.
All of the following pairs of terms are synonymous when used in options trading EXCEPT: A) Exercise price, strike price B) Writing, short C) Intrinsic value, in-the money D) Time value, at-the-money
D) Time value, at-the-money Time value is the premium minus the intrinsic value. An option that is at-the-money has no intrinsic value.
An investor buys 100 shares of ABC stock for $50 per share. He also buys one ABC January 50 put for a premium of $5. What is the maximum profit that the investor can make at expiration of the option? A) $40 B) $45 C) $50 D) Unlimited
D) Unlimited Since the investor is long the stock, the investor would have unlimited profit potential because, theoretically, the price of shares has no upside price limit. The long put option is not a factor in deciding the correct answer in this question.
An investor bought 10 XYZ May 50 puts a few weeks ago. The options expire May 21st. It is April 10th, and she wants to exercise them now. However, she must wait until May 20th. The most likely reason for this is the A) option's exercise style is American B) the broker-dealer has placed a temporary hold on the account. C) investor has exceeded the options position limits. D) option's exercise style is European.
D) option's exercise style is European. American style option may be exercised any time before the expiration date. However, European options may only be exercised in the last business day before the expiration date. There is no indication in the question that leads you to either or the two other answer choices.
One of your clients that is a frequent options trader buys 100 shares of ABC common stock @45 and buys 1 ABC July 50 Put @4. Later the client decides to exercise the put and deliver the long stock position against the exercise. Upon completion of these transactions, for federal tax purposes the customer would have a A) $100 profit B) $100 in losses C) $900 profit D) $900 in losses
A) $100 profit Buys 100 shares of ABC at 45 Buys 1 ABC July 50 put @ 4 exercises the put Premiums | Stock Trans B - 400 | B - 4,500 | S + 5,000 B - 400 | +500 = +100 profit
If a customer buys 1 ABC June 40 put @ 2.50 when the price of ABC stock is at 45, the maximum loss potential to the customer is: A) $250 B) $3,750 C) $4,000 D) Unlimited
A) $250 the customer bought 1 ABC June 40 put @ 2.50 (B- 250)
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 gain potential? A) $4,750 B) $40,000 C) $42,000 D) Unlimited
A) $4,750 writes 10 ABC May 40 calls @ 4.75 Premium Income The customer's maximum gain potential in this question would be the premium income of $4,750.
An option investor decides to buy 4 ABC Aug 60 Calls @ 4 and sell 8 ABC Aug 70 Calls @ 3 when ABC is at 65. What would be the profit or loss to the customer at expiration if the market price of ABC had declined to 50? A) $800 profit B) $800 loss C) $200 profit D) $200 loss
A) $800 profit If the stock declines to 50 both of these call options would expire unexercised, therefore the investor would end up with an $800 profit. Buy 4 Aug 60 calls @4 Sells 8 Aug 70 Calls @ 3 Premiums | Stock Trans. B - 1,600 | S + 2,400 | = +800
An investor holding which of the following securities could receive a dividend? A) ADR's B) LEAPS C) Long Calls D) Rights
A) ADR's American Depository Receipts are securities which can pay a dividend to investors, whereas all other choices listed do not pay dividends.
An investor purchased 100 XYZ at 40 which is now valued at 50. The customer, though not wanting to sell, is bearish on the stock and anticipates the stock may go to 45. The customer's objective is increased income, however, he would also like to protect his existing profit. A suitable recommendation would be: A) Buy an XYZ 50 put and write an WYZ 50 call. B) Write an XYZ 50 put and buy an XYZ 50 call. C) Sell an XYZ 50 straddle. D) Buy an XYZ 50 straddle.
A) Buy an XYZ 50 put and write an WYZ 50 call. When an investor is long a stock and is looking for downside protection the two choices with options would be to either Buy a Put or Sell a Call. In this case since the investor bought the stock at 40 and it has gone up to 50, the investor would want to buy a 50 Put or sell a 50 Call in order to protect the profit they have on their stock position.
An investor purchased 100 XYZ at 40 which is now valued at 50. The customer, though not wanting to sell, is bearish on the stock and anticipates the stock may go to 45. The customer's objective is increased income, however, he would also like to protect his existing profit. A suitable recommendation would be: A) Buy an XYZ 50 put and write an XYZ 50 call. B) Write an XYZ 50 put and buy an XYZ 50 call. C) Sell an XYZ 50 straddle. D) Buy an XYZ 50 straddle.
A) Buy an XYZ 50 put and write an XYZ 50 call. When an investor is long a stock and is looking for downside protection the two choices with options would be to either Buy a Put or Sell a Call.
S & P 100 index options when exercised are settled by the use of which of the following? A) Cash B) stocks from the S & P 500 index C) Treasury Securities D) ETF shares on the index
A) Cash When any index option is traded or exercised settlement is made by the delivery of cash.
In order to receive a dividend, the holder of a call option must file an exercise notice with the O.C.C. when? A) Just prior to ex-date B) On ex-date C) Just prior to record date D) On the record date
A) Just prior to ex-date It must be remembered that "EX" means without therefore an investor must own the stock just prior to the ex-date in order to receive the dividend. Exercise date of the option determines ownership of the stock.
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) Short Calls 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.
An investor buys 1 XYZ July 45 call for 4 when the stock is at 43. If the stock rises to 51 and the investor exercises the call, which of the following is TRUE? A) The stock has a cost basis of $49 per share (45+4) B) He has a $400.00 profit C) He has a $400.00 loss D) The option has a cost basis of $49 per share
A) The stock has a cost basis of $49 per share (45+4) buy 1 XYZ July 45 call for 4 exercises the call Premiums | Stock Trans. B -400 | B - 4,500 = 4,900 / 100 shares = $49 per share or (45+4)
The Option Clearing Corporation settlement date with broker-dealers is the A) following business day after the trade. B) fourth full business day after the trade. C) second full business day after the trade. D) trade date.
A) following business day after the trade. The OCC settlement date is next day. Reg T requirements for the client are four business days after the trade date.
Under option exchange rules, which of the following allocation methods may be used to assign option exercise notices? A) Size of the option position B) FIFO C) LIFO D) Liquidity of the underlying stock
B) FIFO The two permitted methods for assigning an exercise notice are: 1. any random method based on chance, and 2. the "FIFO" method (first in, first out) where the customers with the oldest positions receive assignment notices first.
Mr. Jones is long 100 shares of XYZ stock. Which option transactions would give him the MOST downside protection? A) He should sell one XYZ call and sell one XYZ put. B) He should sell one XYZ call and buy one XYZ put. C) He should buy one XYZ call and sell one XYZ put. D) He should buy one XYZ call and buy one XYZ put.
B) He should sell one XYZ call and buy one XYZ put. If the investor is long the stock, they would be looking for downside protection, which would be to buy a put or sell a call. The best hedge here is the long put. The sold call is covered by the long stock position and the premium provides a minimal amount of cushion in relation to protection from minor fluctuations downward in the market price.
A customer has been looking to buy a call option contract on a particular stock, but at this point, the customer ahs been unable to find options for this particular security. The customer's registered representative is able to find a seller of the option contract, but the trade will take place off of the floor of an exchange. Which of the following is TRUE in this scenario? A) The registered representative is committing securities fraud by going outside of a regulated exchange in order to find the option for the client. B) The transaction in this case would be considered an Over-the-Counter (OTC) trade, because the transaction is not being executed on an exchange. C) The transaction in this case would be considered a listed trade, because all option contracts are standardized and listed on an exchange, even when transactions occur away from an exchange. D) The registered representative is misrepresenting the security that is being traded in this case, as this is likely a right or warrant, and not an option contract.
B) The transaction in this case would be considered an Over-the-Counter (OTC) trade, because the transaction is not being executed on an exchange. Trades that take place off of the floor of an exchange are considered Over-the-Counter (OTC). In this scenario, the transaction is not considered listed because it does not take place on an exchange. As well, it is incorrect to state that all option contracts are standardized and listed on an exchange, as this is not a true statement. The registered representative in this case is not committing securities fraud and is unlikely to be misrepresenting the security (There is no reason to believe that this is a right or warrant).
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) an opening purchase When a investor puts on a new position, it is considered to be "opening" and a buy would represent a "purchase."
An investor that covers a short option position by buying an option would be making a A) closing sale. B) closing purchase. C) opening sale. D) opening purchase.
B) closing purchase. A Closing Purchase is buying an option to cover or close out an existing short position.
An investor who buys a call: A) has the right to sell 100 shares of the underlying stock. B) has the right to buy 100 shares of the underlying stock. C) has the obligation to sell 100 shares of the underlying stock. D) has the obligation to buy 100 shares of the underlying stock.
B) has the right to buy 100 shares of the underlying stock. Investors who buy calls have the right to buy (call away) 100 shares of the underlying stock. Sellers of options are obligated to perform in the event that the buyer of the option decides to exercise. The right to sell 100 shares of the underlying stock is given by purchasing a put option.
If a trader places an order to write a naked call, this transaction would be referred to as: A) opening covered B) opening uncovered C) closing covered D) closing uncovered
B) opening uncovered An option order that establishes a new investment position or investment position or increases the size of an existing investment position is called an "opening" transaction. If the call is naked or uncovered, the option writer does not own the underlying stock that is the subject of the option.
