SIE: Options (Equity/Stock Options)

Which statement is TRUE?

Regular way trades of listed options settle on the business day after trade date Regular way trades of listed stock options settle 1 business day after trade date. In contrast, regular way trades of listed stocks settle 2 business days after trade date.

The last time to trade an equity option that is about to expire is:

3:00 PM Central Time; 4:00 PM Eastern Time; on the 3rd Friday of the expiration month 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.

The maximum life on a regular stock option contract is:

8 months 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 28 months.

Under O.C.C. rules, the maximum "legal" life of a regular stock option contracts is:

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 28 months.

The December stock option contracts of a company assigned to Cycle 2 have just expired. Which contracts will commence trading on the CBOE?

August 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).

A customer owns an ABC Call option. ABC declares a dividend for shareholders on record July 23rd. The last day to exercise the option and get the dividend is:

July 19th 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 23rd, which is July 19th. 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 22nd).

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:

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.)

The issuer of listed options contracts is the:

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 of the following is NOT standardized for listed option contracts?

Premium 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.

The January stock option contracts of a company assigned to Cycle 3 have just expired. Which contracts will commence trading on the CBOE?

September The options cycles are: Cycle 1 Jan Apr Jul Oct Cycle 2 Feb May Aug Nov Cycle 3 Mar Jun Sep Dec Cycle 3 contracts are issued for the months of Mar - Jun - Sept - Dec. One can always get a contract for this month, next month, and the next 2 months in the Cycle. In January, prior to expiration, the contracts that will trade are January (this month), February (next month), March and June (the next 2 months in the cycle). After January contracts expire, the contracts that will trade are February (this month), March (next month), June and September (the next 2 months in the cycle).

The O.C.C. is responsible for all the following EXCEPT:

Trading of listed options contracts The Options Clearing Corporation is the legal 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 O.C.C. does not establish options trading rules - these are established by the exchanges.

The owner of an American style option can exercise the contract:

at any time, up to and including, the expiration date An "American Style" option is one that can be exercised at any time. In contrast, a "European Style" option is one that can only be exercised at expiration. American style options can be exercised up to and including the expiration date - and listed options expire on the 3rd Friday of the expiration month.

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 could NOT exercise the put:

before the ex date 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 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:

on the ex date If a customer owns stock and owns a put on the stock, in order to receive a cash dividend on that stock, the customer cannot exercise until the ex date or after. Exercise settlement is 2 business days after exercise do, so if the put is exercised on the ex date (1 business day prior to record date) or after, the trade will settle after the record date, and the customer will still show as the owner of record to receive the cash dividend. If the customer were to exercise the put before the ex date, the sell trade would settle on the record date or before, taking the customer's name off the shareholder list. Thus, the customer would not be on the record list to receive the cash dividend.

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:

on the ex date or after 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.

To receive a dividend, the holder of a call contract may exercise the contract on all of the following days EXCEPT:

one business day prior to record date To receive a dividend, the holder of a call contract must exercise the contract prior to the ex date. Settlement of exercise takes place in 2 business days. In Choice A, if the customer exercises 2 business days prior to record date, the holder would be entitled to the dividend since the trade settles on the Record Date (the date that the list of holders of record are taken to be sent the dividend). In Choice B, if exercise occurs two business days prior to ex date, the trade settles on the ex date. Since the ex date is 1 business day prior to the Record Date, the customer has settled in time to receive the distribution. In Choice C, if the customer exercises one business day prior to Record Date, the trade settles on the business day following the Record Date and the customer will not receive the dividend. In Choice D, the customer has effected the trade on the last day possible to receive the dividend - which is the business day prior to the ex date. This is 2 business days prior to the Record Date (the ex date is 1 business day prior to Record Date), so the trade will settle on the Record Date and the customer will receive the dividend.

If a customer exercises an equity call contract, the customer must:

pay the strike price for the security in 2 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 2 business days after trade (exercise) date.

Equity options contracts for a given month expire on the:

third Friday of the month at 11:59 PM Eastern Standard Time Equity options contracts for a given month expire on third Friday of the month at 11:59 PM Eastern Standard Time. The trading cut-off is 4:00 PM ET on the same day.

The Options Clearing Corporation is responsible for all of the following EXCEPT:

trading of listed options contracts The Options Clearing Corporation is the legal 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 O.C.C. does not establish options trading rules - these are established by the exchanges.

A put is assigned just after the ex date for a cash dividend. The customer:

will not receive the dividend 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.

A put is assigned prior to the ex date for a cash dividend. The customer:

will receive the dividend 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.