Options Test Review
If an investor sold two BCD Feb 40 calls at 4 on August 4, 2021, and the call expired unexercised, what were the tax consequences?
$800 short-term capital gain for tax year 2022 For tax purposes, any premiums earned are recognized at the expiration date. In this case, the February call options sold in August 2021 for $400 each and expired in February 2022. Uncovered options writers always have short-term gains or losses.
If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk?
A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and it protects against losses below the strike price.
The Options Clearing Corporation (OCC) automatically exercises an open equity option contract if, at expiration, the contract is in the money by
At expiration, the OCC automatically exercises options that are in the money by 0.01 or more for both customer and member firm accounts.
On December 13, an investor buys six ABC Feb 60 calls at 2.25 each, when ABC is trading at 59.50 per share. If the calls expire unexercised, how much money will the investor lose?
Buyers of options lose premiums if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium (2.25). This investor's maximum loss is $1,350.
An investor purchased 100 shares of JKL common stock at a price of $42 per share on April 22, 2020. On June 27, 2021, JKL's market price was $51, and the investor liquidated the position. Which of the following transactions made on October 17, 2020, would have an effect on the investor's tax treatment of this gain?
Buying a Feb 45 JKL put
An investor owns six RIF Apr 150 puts. How many shares of the RIF will change hands if all the options are exercised?
Each of the six contracts allows the owner to sell (put) 100 shares of the RIF stock at $150 per share. If all six contracts are exercised, that will be 6 × 100 = 600 shares.
A customer is short a DMF 50 call for which he received a premium of 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the Internal Revenue Code, what were the proceeds of his sale?
He wrote a call and received a premium of 4. He later sold the security at $50, which made his total receipts for the stock $54. Proceeds in this case refers to the total amount he took in (a $400 premium plus $5,000 upon the sale).
Which of the following positions subject an investor to unlimited risk? Short naked call Short naked put Long put Short sale of stock
I and IV
If TCB is trading at 43 and the TCB Apr 40 call is trading at 4, what are the intrinsic value and the time value of the call premium?
Intrinsic value: 3; time value: 1 The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a minimum premium of $3 per share. Because the actual premium is 4, the balance of 1 represents time value. The premium, minus the intrinsic value, equals the time value. This is true whether the option is a put or a call.
Which of the following is a bull spread?
Long Jul 30 put, short Jul 35 put A debit call spread is bullish and a credit put spread is bullish. Long July 30 put, short July 35 put is the only bullish position in the answer choices.
In the trading of options, there are a number of different multiple option strategies. An investor has the following position: Buy one RIF Apr 120 call Buy one RIF Jul 130 put Which strategy is the investor using?
Long combination A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security. A straddle is when the expiration dates and exercise prices are the same. A spread consists of a long and short position in the same options class (two puts or two calls). A spread, diagonal or not, is a long and a short in the same type of option (two calls or two puts). In a time spread, everything is the same except the expiration dates.
Your client's position is long 100 MNO purchased at 90. Which of the following strategies will limit the customer's loss to $700?
Long one MNO 90 call at 4, long one MNO 90 put at 3 It is the long put in this straddle position that limits the maximum loss on the long stock position. If the MNO stock drops to $0, the customer loses $9,000 on the long stock position but retains the right to sell the stock to someone at $9,000 to prevent loss beyond the premium of $300. The call would expire out of the money, for a total loss of $700.
A customer opens the following options position: Long 1 ALE Feb 40 put @3¼; short 1 ALE Feb 45 put @6¼. What is the customer's maximum gain, maximum loss, and breakeven point?
Maximum gain is $300; maximum loss is $200; breakeven point is $42. The first step is to identify the position. This is a credit put spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $300 is the most the investor can make. This is a bullish spread (the customer bought the low strike price and sold the high strike price). If the customer is correct and the stock rises above $45, the options will expire unexercised and the customer will keep that net credit of $300. If the customer is wrong and the price of the ALE stock falls below $40, the short put at 45 will be exercised, causing the customer to purchase the stock at $45. Then, the customer will exercise the long 40 put and sell that stock at $40. This results in a loss of $500 reduced by the $300 net credit, or $200 maximum loss. It is always easier to recognize that the maximum loss is the difference in strike prices minus the maximum profit. In this question, the spread is 5 points and the maximum profit is the credit of 3 points. That makes the maximum loss the remaining 2 points. Breakeven follows the put-down rule. Subtract the net premium from the higher strike price ($45 - 3 = $42).
A customer establishes the following positions: Buy 100 ABC for 63 Write 1 ABC Jan 70 call for 1 What is the customer's maximum gain?
Maximum gain on the covered call position occurs when the stock's market value rises. The short call is exercised when the stock is above 70, so the stock bought for 63 will be sold for 70—a profit of $7 per share. In addition, the customer receives the premium of $1, so the total profit is $800 ($700 + $100).
An investor with a well-diversified portfolio oriented toward growth has 60% invested in the stocks of 28 different companies. She would like to hedge the downside risk for the equities and is comfortable using options to do so. Which of the following is most suitable?
Purchase index option puts Selling options to hedge adds income to the account (premiums received), but the protection is limited. The best hedging protection is to purchase options, and to hedge long stocks, purchasing puts is the most suitable. With so many stocks to hedge, doing so individually would not be cost effective due to commissions. On the other hand, hedging the entire portfolio with index options allows the hedge to be done in fewer transactions or perhaps even in a single transaction.
If the Swiss franc is trading at 0.69, and a customer buys 1 Sep SF 70 put and writes 1 Sep SF 65 put, this position is
The 70 put is dominant because it will have a higher premium than the 65 put. Buying puts is bearish; this is a debit put spread.
Your client sells one naked MAV Oct 40 call at 2 when the market price of MAV is $41. What must MAV be selling at for the client to break even?
The breakeven point for a call is the strike price plus the premium (call up). The breakeven point is the same for both the buyer and the writer.
A customer establishes the following positions: Buy 100 ABC at 28 Buy 1 ABC Dec 25 put at 2 What is the breakeven point?
The breakeven point is where an investor neither makes nor loses money. In this hedged position, the buyer must recover the cost of the stock and the premium paid to break even (28 + 2 = 30).
With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true except
This option is at parity, which occurs when the premium equals the in-the-money amount. An option trading at parity over the strike price has no time value, only intrinsic value. When an option has no time value remaining, it is very near or at the moment of expiration.
Which of the following would be considered a bearish strategy?
Writing a call
Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC Options Disclosure Document
at the time of or before account approval.
A technology fund manager concerned about a downturn in the value of his portfolio would hedge by
buying narrow-based index puts.
When opening an options trading account, a broker-dealer is required by FINRA to
make sure the options agreement is signed and returned to the firm within 15 days of the account being approved. The options agreement must be signed and returned to the firm within 15 days of the account being approved. If it is not, then the only options activity permitted is closing transactions. A Registered Options Principal (Series 4) or Sales Principal (Series 10) signs off on the account approval. There is no requirement to determine the existence of accounts (options or otherwise) at another member firm.
Your clients, an elderly retired couple on a small fixed monthly income, want to write uncovered (naked) calls in their joint account to generate income. For this account, this option strategy would most likely be deemed
not suitable, because it is a speculative strategy with unlimited loss potential.
A stock is trading consistently between $20 and $24. The investor with a long position is neutral on the stock. The goal is to generate income. Which of the following recommendations is most appropriate?
sell a call
All of the following option contracts are in the money when XYZ is 54 except
short XYZ 50 put.
In a volatile market, which of the following option strategies carries the most risk?
short straddle To establish a short straddle, the investor sells a call and a put; the short call carries unlimited loss potential.
An investor buys two ABC Nov 50 calls, three ABC Dec 45 calls, and one ABC Jan 50 call. The best way to describe the portfolio is that it consists of
six options of the same class. A class of options is when they are all of the same type (in this case, calls) and all on the same underlying security (in this case, ABC). Yes, they are all of the same type, but, in a question like this, FINRA is asking for the most specific answer. Same class is more specific than same type. The same series would be if they all had the same expiration date and exercise price.
Your customer is interested in buying call options on CDL common stock. The client asks you, "Who issues CDL options?" The proper response is
the Options Clearing Corporation.
If an investor establishes a call spread, and buys the lower exercise price and sells the higher exercise price at a net debit, he anticipates that
the spread will widen. Debit spreads are profitable when both sides are exercised or the spread widens between the premiums. Credit spreads are profitable when both sides expire or the spread narrows between the premiums.
