Series 66
A client is long 400 shares of ABC common stock. The current market price of ABC is $150 per share. The client is of the opinion that the market is going to be moving sideways for a while and would like to generate additional income from the ABC stock. What strategy might you recommend? A) Write four ABC 150 put options B) Write four ABC 150 call options C) Write an ABC 150 call option D) Buy two ABC 150 put options and write two ABC 150 call options
B) Write four ABC 150 call options Writing call options on a long stock position (a covered call) is a common strategy for generating additional income from a stock holding. If the market moves sideways (neither up nor down), the option will likely expire unexercised and the client will earn the premium and still have the stock. Being long 400 shares would mean writing four contracts. Writing put options would generate premium income, but if the stock price falls, the writer could be exercised requiring the purchase of an additional 400 shares at $150 per share (the client really doesn't want to own 800 shares). If the client buys two options and sells two options, the premiums will likely offset each other and not help the client reach the objective of generating additional income.
For which of the following is there no active secondary market? A) Futures contracts B) ETFs C) Options D) Forward contracts
D) Forward contracts One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.
Which type of contract obligates both parties to act? Forward contract Futures contract Options contract Warrant
Forward contract Futures contract It is only in the case of forward and futures contracts that both parties are obligated to fulfill the terms of the contract. Only the seller of an options contract is obligated, and in the case of a warrant, it is the issuer of the warrant who is obligated to deliver the underlying shares if the owner exercises.
Mutual Fund Expense Ratio Formula
fund expenses/average net assets
Rights have ____ value and _____ value, while warrants only have ____ value
rights have intrinsic and time value while warrants only have time value. At the time of issuance, preemptive rights always offer the stock at a price below the current market, thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value.
