Options: Equity (Stock) Options

The November stock option contracts of a company assigned to Cycle 1 have just expired. Which contracts will commence trading on the CBOE? a. Dec b. Jan c. Apr d. Jul

Jul

ABC Corporation is trading in the market for $51. The corporation declares a 25% stock dividend. After the ex date, the holder of 1 ABC Jan 50 call will have: a. 1 ABC Jan 50 call b. 1.25 ABC Jan 50 calls c. 1 ABC Jan 40 call d. 1.25 ABC Jan 40 calls

1 ABC Jan 50 call

A customer owns 1 XYZ Jul 30 Put. XYZ goes ex dividend $.50. As of the morning of the ex date, the contract will cover: A. 100 shares at $29.50 B. 100 shares at $30.00 C. 101 shares at $29.50 D. 101 shares at $30.00

100 shares at $30.00 Listed option contracts are not adjusted for cash dividends. They are only adjusted for 2:1 and 4:1 stock splits. For other types of stock splits and stock dividends, there is no adjustment to the contract. However, if the contract is exercised, the "deliverable" is adjusted accordingly.

Regular stock option contracts can be purchased with all of the following lives EXCEPT: A. 3 months B. 6 months C. 9 months D. 12 months

12 months The maximum life of a regular stock option contract is 8 months (this may be tested as 9 months, though, since this legally is the maximum length permitted, though in practice 8 months is the actual maximum life of contracts issued). Longer term stock options, known as LEAPs (Long Term Equity AnticiPation options) have a maximum life of 30 months.

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

3:00 PM central time; 4:00 PM eastern time; on the 3rd Friday of the expiration month

Exercise limits on stock option contracts cover a time period of: a. 5 business days b. 10 business days c. one calendar month d. nine calendar months

5 business days

The maximum 'legal' life on a regular stock option contract is: a. 6 months b. 9 months c. 12 months d. 30 months

9 months

O.C.C. rules limit the maximum "legal" life of an equity option contract to: A. 9 days B. 9 months C. 30 days D. 30 months

9 months 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.

Which of the following are "classes" of options? I. ABC calls II. ABC puts III. ABC Jan 50 calls IV. ABC Jan 50 puts

ABC calls ABC puts

Which of following will create a "covered" short put position under O.C.C. rules? I. Long a put on the same stock with the same strike price or higher with the same expiration or later II. Bank Guarantee Letter III. Short stock position in the underlying security

All of them

The issuer of listed options contracts is the: A. holder of the contract B. writer of the contract C. exchange where the contract is traded D. Options Clearing Corporation

Options Clearing Corporation 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.)

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 3 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 3 business day after trade date

Regular way trades of listed stocks settle 3 business days after trade date Regular way trades of listed stock options settle on the business day after trade date Regular way trades of listed stocks settle 3 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 options strategies would be considered a covered call? A. Long 1 ABC Jan 50 Call; Long 1 ABC Jan 50 Put B. Long 1 ABC Jan 50 Call; Long 2 ABC Jan 50 Puts C. Short 1 ABC Jan 50 Call; Long 100 ABC stock @ $50 D. Short 1 ABC Jan 50 Call; Short 100 ABC stock @ $50

Short 1 ABC Jan 50 Call; Long 100 ABC stock @ $50 To be covered, a call writer can sell a call contract against the underlying long physical security position. If the market rises, the call is exercised and the call writer delivers the long stock position that is owned.

The O.C.C. is responsible for which of the following? I. Standardization of listed options contracts II. Trading of listed options contracts III. Issuance of listed options contracts IV. Assignment of exercises of listed options contracts

Standardization of listed options contracts Issuance of listed options contracts Assignment of exercises of listed options contracts

If a customer decides to exercise his option contract, which of the following statements are TRUE? I. The customer notifies the brokerage firm II. The customer notifies the O.C.C. III. The O.C.C. selects a short position to be exercised on a first-in, first-out basis IV. The O.C.C. selects a short position to be exercised on a random order basis

The customer notifies the brokerage firm The O.C.C. selects a short position to be exercised on a random order basis If a customer decides to exercise his contract, he notifies his brokerage firm, who notifies the O.C.C. When the O.C.C. receives an exercise notice from the brokerage firm, it selects a short contract to be exercised on a random order basis. When the brokerage firm that has the short position receives that notice from the O.C.C., it is permitted to select the particular customer to be exercised on either a

Stock options contracts: I. are American style II. are European style III. can be issued at any time IV. can be exercised at any time

are American style can be exercised at any time

A customer sells 1 ABC Jan 55 call. To cover the position, the customer could: a. buy 1 ABC Jan 50 call b. sell 1 ABC Jan 50 put c. buy 1 ABC Jan 60 call d. sell 1 ABC Jan 60 put

buy 1 ABC Jan 50 call

Regular way trades of all of the following securities settle next business day EXCEPT: a. listed stocks b. listed stock options c. U.S. Government securities d. agency securities

listed stocks

A customer is long 10 ABC Jan 60 Call contracts. ABC Corporation has just declared a $1 per share dividend. To receive the dividend, the customer must: A. sell the contracts prior to the ex date B. sell the contracts prior to the record date C. file an effective exercise notice with the Options Clearing Corporation prior to the ex date D. file an effective exercise notice with the Options Clearing Corporation after the ex date

file an effective exercise notice with the Options Clearing Corporation prior to the ex date To receive a dividend, the holder of a call contract must exercise the contract prior to the ex date. Since settlement of exercise takes place in 3 business days, the customer will have settled the exercise on, or before, the record date, and will receive the dividend.

A customer purchases an equity option contract at 1:00 PM eastern standard time on Tuesday, October 10th in a regular way trade. If the customer wishes to exercise, the customer may place an exercise notice with the Options Clearing Corporation a. immediately b. no earlier than 10:00 AM Eastern Standard time, the next business day c. no earlier that 10:00 AM eastern standard time, on the 5th business day following trade date d. no earlier than the Friday immediately preceding the third Saturday of the expiration month

immediately

In order to receive a dividend distribution, the last time for the holder of a call option to exercise is: A. at least 3 business days prior to the ex date B. just prior to the ex date C. just prior to the record date D. just after the ex date

just prior to the ex date Exercise of an option results in a regular way trade. Stocks settle regular way 3 business days after trade date. Since the ex date is set at 2 business days prior to the record date, to receive the dividend, the stock must be bought 3 business days prior to the record date (or just prior to the ex date). Exercising the call just prior to the ex date is the same as buying the stock just prior to the ex date.

To receive a dividend, the holder of a call contract may exercise the contract on all of the following days EXCEPT: A. three business days prior to record date B. three business days prior to ex date C. one business day prior to record date D. one business day prior to ex date

one business day prior to record date In Choice C, if the customer exercises one business day prior to Record Date, the trade settles 2 business days after the Record Date and the customer will not receive the dividend.

Exercise limits on stock option contracts cover a time period of: A. one business day B. one calendar day C. one calendar week D. one calendar month

one calendar week Exercise limits are applied to all exercises occurring within a 5 business day period - the same as 1 calendar week.

If a customer exercises an equity call contract, the customer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 3 business days C. deliver the security the next business day D. deliver the security in 3 business days

pay the strike price for the security in 3 business days 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. Regular way settlement of stock trades occurs 3 business days after trade (exercise) date.

All of the following are standardized for listed options contracts except: a. strike price b. contract size c. premium d. expiration

premium

The O.C.C. assigns exercise notices on a: a. first in; first out basis b. last in; first out basis c. random order basis d. method of reasonable fairness

random order basis

When the O.C.C. receives an exercise notice from a brokerage firm, it selects a short contract to be exercised on a: a. method of reasonable fairness b. LIFO basis c. FIFO basis d. random order basis

random order basis

In determining whether there has been a violation of position limits, long calls will be aggregated with: I. long puts II. short calls III. short puts

short puts

Trading on a stock is suspended. Which statement is TRUE regarding the trading of listed options on that stock? a. only opening transactions are permitted b. only closing transactions are permitted c. both opening and closing transactions are permitted until the contracts expire d. trading will be halted in options contracts on the suspended stock

trading will be halted in options contracts on the suspended stock