Equity (Stock) Options
A customer purchases an equity option contract at 1:00 PM Eastern Standard Time on Tuesday, October 10th in a cash trade, and files an exercise notice at 3:00 PM on the same day. The option contract will first be exercised by the Options Clearing Corporation: A. immediately B. no earlier than 10:00 AM Eastern Standard Time, the next business day C. no earlier than 10:00 AM Eastern Standard Time, on the 3rd business day following trade date D. no earlier than the Friday immediately preceding the third Saturday of the expiration month
A. An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. The Options Clearing Corporation does not assign the exercise until the transaction settles, which is the same day for a cash trade. Once the assignment occurs, the stock must be delivered to the holder of the call; or the stock must be delivered to the writer of the put; 2 business days after assignment.
A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. In order to receive the dividend, the customer must exercise the put: A. on the ex date B. on the record date C. before the ex date D. before the record date
A. Because exercise settlement of listed stock options occurs 2 business days after trade date, in order to retain the cash dividend, the holder of the shares cannot sell them before the ex date (which is 1 business day prior to record date). If the put is exercised on the ex date or later, the trade will settle after the record date, and the customer will be on record to receive the cash dividend. On the other hand, if the long put were exercised before the ex date, the trade would settle on the record date or before, and the customer would be selling the stock, taking him- or herself off the record book on the record date or before, so that client would not receive the dividend.
Equity options contracts for a given month expire on the: A. third Friday of the month at 11:59 PM Eastern Standard Time B. Friday following the third Saturday of the month at 11:59 PM Eastern Standard Time C. Friday before the third Wednesday of the month at 11:59 PM Eastern Standard Time D. Friday following the third Wednesday of the month at 11:59 PM Eastern Standard Time
A. Equity options contracts for that month expire on the third Friday of the month at 11:59 PM Eastern Standard Time. They can be traded until 4:00 PM ET on that day.
A put is assigned prior to the ex date for a cash dividend. The customer: A. will receive the dividend B. will not receive the dividend C. must pay the dividend D. is not required to pay the dividend
A. If the put is "assigned," it means that the OCC (Options Clearing Corporation) has selected that put writer to receive the exercise notice (because a holder of that contract has chosen to exercise), obligating the writer of the put to buy the stock in a regular way trade. Because the writer of the put is assigned prior to the ex date, the writer is buying the stock in time to get the dividend. If the put is assigned on the ex date or after, the writer would not get the dividend.
After exercising an equity options contract, the trade settles: A. next business day after trade date B. in 2 business days after trade date C. in 3 business days after trade date D. in 7 calendar days after trade date
B. Exercise of an option results in a regular way trade. Stocks trades settle regular way 2 business days after trade date.
A customer purchases an equity option contract in a regular way trade at 1:00 PM Eastern Standard Time on Tuesday, October 10th, and files an exercise notice at 3:00 PM on the same day. The option contract will first be assigned by the Options Clearing Corporation: A. immediately B. no earlier than 10:00 AM Eastern Standard Time, the next business day C. no earlier than 10:00 AM Eastern Standard Time, on the 3rd business day following trade date D. no earlier than the Friday immediately preceding the third Saturday of the expiration month
B. An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. However, the Options Clearing Corporation does not handle the exercise until the morning of the next business day (which is also the day that the customer must pay for the option contract in a regular way settlement). This procedure is followed because the Options Clearing Corporation does not receive the report of the purchase of the option until the close of trading on the day that the contract is purchased. The O.C.C. opens the next day with the customer recorded as being "long" that contract, and can now assign an exercise notice to a writer.
A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. In order to receive the dividend, the customer must exercise the put: A. before the ex date B. on the ex date or after C. before the record date D. on the record date or after
B. Because exercise settlement of listed stock options occurs 2 business days after trade date, in order to retain the cash dividend, the holder of the shares cannot sell them before the ex date (which is 1 business day prior to record date). If the put is exercised on the ex date or later, the trade will settle after the record date, and the customer will be on record to receive the cash dividend. On the other hand, if the long put were exercised before the ex date, the trade would settle on the record date or before, and the customer would be selling the stock, taking him- or herself off the record book on the record date or before, so that client would not receive the dividend.
A customer owns an ABC Call option. ABC declares a dividend for shareholders on record July 10th. The last day to exercise the option and get the dividend is: A. July 5th B. July 8th C. July 9th D. July 10th
B. If an option is exercised, a regular way stock trade results (2 business day settlement). To be an owner of record, the call must be exercised 2 business days prior to July 10th, which is July 8th. Notice that to get the dividend, the call must be exercised just prior to the ex date, (which is the business day before the record date, so in the case the ex date is July 9th).
A put is assigned just after the ex date for a cash dividend. The customer: A. will receive the dividend B. will not receive the dividend C. must pay the dividend D. is not required to pay the dividend
B. If the put is "assigned," it means that the OCC (Options Clearing Corporation) has selected that put writer to receive the exercise notice (because a holder of that contract has chosen to exercise), obligating the writer of the put to buy the stock in a regular way trade. Because the writer of the put is assigned after the ex date, the writer is buying the stock after the last date to get the dividend. Thus, the writer would not get the dividend.
If the writer of a put contract is assigned, the put writer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 2 business days C. deliver the security the next business day D. deliver the security in 2 business days
B. If the writer of a put is "assigned," this means that the OCC has assigned an exercise notice to that put writer. The put writer is then obligated to buy the stock from the put holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
The last time to trade expiring equity options is: A. 4:00 PM Eastern Standard Time; 3:00 PM Central Time; on the day prior to expiration B. 4:00 PM Eastern Standard Time; 3:00 PM Central Time; on the expiration day C. 5:30 PM Eastern Standard Time; 4:30 PM Central Time; on the day prior to expiration D. 5:30 PM Eastern Standard Time; 4:30 PM Central Time; on the expiration day
B. Listed equity options trade until 4:00 PM Eastern Standard Time on the third Friday of the expiration month. The contracts expire at 11:59 PM Eastern Standard Time, on the third Friday of the month. Note that Central Time is included in the question because both the CBOE and OCC are located in Chicago, which is on Central Time.
Regular way trades of options settle: A. same business day B. next business day C. in 2 business days D. in 5 business days
B. Regular way trades of stock options are settled next business day. Do not confuse this with an exercise of a stock option. If an exercise occurs, this results in a regular way stock trade that settles 2 business days after exercise date.
The Options Clearing Corporation is responsible for all of the following EXCEPT: A. standardization of listed options contracts B. setting the premium of listed options contracts C. issuance of listed options contracts D. assignment of exercises of listed options contracts
B. The Options Clearing Corporation is the technical issuer and guarantor of listed options contracts. The O.C.C. standardizes the options contracts that it will issue to increase potential investor participation. If there is an exercise of an option contract, it is the O.C.C. who assigns the exercise notice to a writer of that contract. Trading of listed options contracts takes place on exchange floors, under the rules of the exchange. The premium is the price of the contract, established in the marketplace - it is not set by the O.C.C.
The last time to trade an equity option that is about to expire is: A. 2:00 PM Central Time; 3:00 PM Eastern Time; on the 3rd Friday of the expiration month B. 3:00 PM Central Time; 4:00 PM Eastern Time; on the 3rd Friday of the expiration month C. 4:00 PM Central Time; 5:00 PM Eastern Time on the 3rd Friday of the expiration month D. 5:00 PM Central Time; 6:00 PM Eastern Time on the 3rd Friday of the expiration month
B. The largest equity options market is the Chicago Board Options Exchange, which is on Central Time. Thus, cut-off times for options are stated in both Central Time and Eastern Time. Options are traded during the same hours as the NYSE. Trading on the NYSE stops at 4:00 PM (Eastern Time), which is 3:00 PM Central Time, so options trade until 4:00 PM Eastern Time, 3:00 PM Central Time. Trading takes place through the third Friday of the month.
An American Style stock option differs from a European style stock options because it can be: A. traded anytime until expiration B. exercised anytime until expiration C. issued at any time until expiration D. redeemed anytime until expiration
B. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.
Which statements are TRUE? I Regular way trades of listed stocks settle on the business day after trade date II Regular way trades of listed stocks settle 2 business days after trade date III Regular way trades of listed stock options settle on the business day after trade date IV Regular way trades of listed stock options settle 2 business day after trade date A. I and III B. I and IV C. II and III D. II and IV
C. Regular way trades of listed stocks settle 2 business days after trade date. In contrast, regular way trades of listed stock options settle 1 business day after trade date.
Which of the following are standardized for listed option contracts? I Strike price II Contract size III Premium IV Expiration date A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV
C. Exchange traded option contracts have standardized contract sizes (e.g., 100 shares of stock), expiration dates (the 3rd Friday of the month), and strike prices (generally 5 point strike price intervals). The premium or "price" of the option is determined minute by minute in the trading market.
An exercise of a listed stock option settles: A. the same day B. the next business day C. in 2 business days D. in 5 business days
C. If a customer exercises a call contract, the customer is buying the stock in a regular way trade (the exercise date is considered to be the trade date). The customer must pay the strike price to the writer on settlement. If a customer exercises a put contract, the customer is selling the stock in a regular way trade (the exercise date is considered to be the trade date). The customer must pay the strike price to the call writer; or deliver the stock to the put writer; on settlement. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
Under O.C.C. rules, the maximum "legal" life of a regular stock option contracts is: A. 3 months B. 6 months C. 9 months D. 12 months
C. Legally, the maximum life of a regular stock option contract is 9 months. Currently, the way that options are issued, the actual maximum life is 8 months. Longer term stock options, known as LEAPs (Long Term Equity AnticiPation options) have a maximum life of 30 months.
Regular way trades of which of the following securities settle next business day? I Listed stocks II Listed stock options III U.S. Government bonds A. I only B. II only C. II and III only D. I, II, III
C. Regular way trades of both listed options and U.S. Government securities settle next business day. Regular way trades of stocks and corporate and municipal bonds settle 2 business days after trade date.
All of the following statements are true about stock options contracts EXCEPT they: A. are American style B. can be traded at any time C. can be issued at any time D. can be exercised at any time
C. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.
If the writer of a call contract is assigned, the call writer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 2 business days C. deliver the security the next business day D. deliver the security in 2 business days
D. If the writer of a call is "assigned," this means that the OCC has assigned an exercise notice to that call writer. The call writer is then obligated to deliver the stock to the call holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
An opening trade in a call option contract takes place on the American exchange (AMEX) between a buyer at ABCD Securities and a writer at PDQR Securities. The issuer of the contract is: A. American Stock Exchange B. ABCD Securities C. PDQR Securities D. Options Clearing Corporation
D. The Options Clearing Corporation (O.C.C.) is the legal issuer and guarantor of all exchange traded options. Thus, the purchaser of an option contract is relieved of the worry that a writer will not perform on an exercise - since technically, the O.C.C. is the writer of the contract. (The O.C.C. requires that member firms deposit daily monies to ensure that the firms, if their customers are writers who have been exercised, can perform on the exercise.)
If it is now December, regular options contracts could be traded with all of the following expirations EXCEPT: A. January B. April C. July D. November
D. The maximum life of a regular stock option contract is 8 months (this may be tested as 9 months, though). Longer term stock options, known as LEAPs (Long Term Equity AnticiPation options) have a maximum life of 30 months.
The November stock option contracts of a company assigned to Cycle 1 have just expired. Which contracts will commence trading on the CBOE? A. December B. January C. April D. July
D. The options cycles are: Cycle 1 Jan Apr Jul Oct Cycle 2 Feb May Aug Nov Cycle 3 Mar Jun Sep Dec Cycle 1 contracts are issued for the months of Jan - Apr - Jul - Oct. One can always get a contract for this month, next month, and the next 2 months in the Cycle. In November, prior to expiration, the contracts that will trade are November (this month), December (next month), January and April (the next 2 months in the cycle). After November contracts expire, the contracts that will trade are December (this month), January (next month), April and July (the next 2 months in the cycle).
The December stock option contracts of a company assigned to Cycle 2 have just expired. Which contracts will commence trading on the CBOE? A. January B. February C. May D. August
D. The options cycles are: Cycle 1 Jan Apr Jul Oct Cycle 2 Feb May Aug Nov Cycle 3 Mar Jun Sep Dec Cycle 2 contracts are issued for the months of Feb - May - Aug - Nov. One can always get a contract for this month, next month, and the next 2 months in the Cycle. In December, prior to expiration, the contracts that will trade are December (this month), January (next month), February and May (the next 2 months in the cycle). After December contracts expire, the contracts that will trade are January (this month), February (next month), May and August (the next 2 months in the cycle).