Chapter 3: Series 6/SIE

An investor buys 100 shares of ABC at $47 per share. Later, the investor writes an ABC Aug 50 call at 4. The investor will break even when the underlying stock is at: [A]$40 [B]$43 [C]$47 [D]$51

$43

An investor is long 1 OEX Aug 500 put @10 when the index is at 550. The index closes at 450. The investor decides to exercise his option. What will he get at settlement? [A]$10,000 [B]$5,000 [C]$50,000 [D]5,000 shares.

$5,000 Index options are always settled in cash when exercised. The cash settlement amount is the difference between the contract value ($500 x 100 multiplier = $50,000) and the index value ( $450 x 100 multiplier = $45,000) at the time of exercise. Therefore, $50,000 - $45,000 = $5,000 cash settlement. This is the in-the-money amount of the option.

A customer buys 1 XYZ October 50 call at 3. He later exercises the option when XYZ is selling at $60 per share. The cost basis of the 100 shares for Federal tax purposes is? [A]$4,700 [B]$5,000 [C]$5,300 [D]$6,000

$5,300

In which of the following scenarios is a registered representative (RR) PROHIBITED from selling a call option for a client? [A]An RR with discretionary authority over a client's account places an order to sell a call against securities held in the client's portfolio.[B]An institutional client instructs the RR to sell a call against a 5% position in the underlying stock. [C]An RR receives an order from an Investment Adviser with third party trading authorization to sell calls in a client's account. [D]A corporate client instructs the RR to sell a call against company stock.

A corporate client instructs the RR to sell a call against company stock. Corporations can never sell call options or buy put options on their own securities.

Which of the following would influence the price of option premiums? [A]The amount of time until the option contract expires [B]The market price of the underlying stock [C]The volatility of the underlying stock's price [D]All of these items influence the price of option premiums

All of these items influence the price of option premiums

A "series" of options is: [A]All option contracts of the same type. [B]All option contracts of the same type covering the same underlying stock. [C]All option contracts of the same class having the same expiration date and unit of trading. [D]All option contracts of the same class having the same expiration date, exercise price, and unit of trading.

All option contracts of the same class having the same expiration date, exercise price, and unit of trading.

An investor can trade Foreign Currency Options on all of the following EXCEPT: [A]Euro [B]Swiss Francs [C]American Dollars [D]Japanese Yen

American Dollars

Your client purchased XTX stock at 60. The stock is now at 70. Your client believes the price will decline to 65. He should: [A]Buy a 70 Put or write a 70 call [B]Sell a straddle at 70. [C]Buy a 70 call and write a 70 put. [D]Buy a straddle at 70.

Buy a 70 Put or write a 70 call Since the investor is long the stock (a bullish bet) and would make money as the stock price goes up, the investor would get downside protection by either buying a put or writing a call (bearish bets). In this case the stock is at 70 and is expected to go down to 65. Therefore, the investor's best bet would be to buy a 70 put because the price of the put will increase if and when the price of XTX stock decreases.This is known as a protective put because it' locks in the $10.paper profit. As a second alternative, the investor could write a 70 call. He would do this when he expects the price of the stock to remain stable or decrease slightly. If he writes a call, he would earn a premium payment and thus increase his rate of return on his stock position.

Which of the following option strategies would best be suited for an investor with a portfolio of blue chip stocks who is also seeking income? [A]Spreading calls or puts [B]Covered put writing [C]Uncovered put writing [D]Covered call writing

Covered call writing The best way for this investor to generate additional income would be to write covered calls. The stability and conservative nature of blue chip stocks is often one of their selling points. This stability also allows investors who anticipate no change or minimal declines to write call options and generate premium income on their underlying securities with minimal risk. Writing puts may force the investor to buy additional securities (whether covered or uncovered). Spread positions are more involved options strategies that carry additional risk because multiple options positions are taken.

All of the following are correct concerning customer background and financial information according to option exchange rules, EXCEPT: [A]Financial information which the customer supplies must be verified by the broker/dealer within 15 days after the account has been approved for options transactions. [B]If the firm becomes aware of material changes concerning existing customers, a copy of background and financial information on file must be sent to the customer within 15 days after the firm becomes aware of the change. [C]Customer background and financial information must be sent to the customer by the firm for verification within 15 days after the account is approved for options transactions unless it is contained in the customer's account agreement. [D]Customer background and financial information must be returned by the customer to the firm for account purposes within 15 days of being sent and reviewed by the customer.

Customer background and financial information must be returned by the customer to the firm for account purposes within 15 days of being sent and reviewed by the customer. Background and financial information of a customer must be verified within 15 days after the account was approved for options trading. Material changes would require additional verification within 15 days of the change. These conditions must take place unless the background and financial information were included in the customer's account agreement. The customer does NOT need to return the information within 15 days of it being sent.

An investor expects the market value of ABC to remain neutral over the next few months. He is long ABC. How could this investor utilize the expectation that ABC will remain neutral? [A]He could put on a long straddle. [B]He could sell a call. [C]He could buy a put. [D]He could go short against the box.

He could sell a call. Based on the fact that the investor is long the stock and expects the market to remain stable, the investor would increase his rate of return by selling a call option on the underlying security

Which two of the following options strategies would be considered "bullish"? Selling uncovered put options Selling uncovered call options Buying put options Buying call options [A]I and III [B]I and IV [C]II and III [D]III and IV

I and IV Long calls and short puts are both "bullish" positions - covered or uncovered.

Which of the following are required in order to open an options account? The RR must inquire about the investment objectives of the customer. The RR must gather and keep record of customer financial background information. The RR must provide an Options Disclosure Document The customer must sign a document agreeing not to violate position limit and exercise limit rules. [A]II only [B]II and IV only [C]III and IV only [D]I, II, III, and IV

I, II, III, and IV

Which of the following terms represents option positions? Opening Purchase Opening Sale Closing Purchase Closing Sale [A]I and II [B]III and IV [C]II and III [D]I, II, III, and IV

I, II, III, and IV All choices represent terms which describe option positions.

At expiration, if the market price of the underlying stock is the same as the strike price of the option, which of the following positions would result in a profit? Long call Short call Short call/short put Long call/long put [A]I and III [B]II and IV [C]I and IV [D]II and III

II and III If the market price is the same at the strike price, none of these positions would be exercised, causing the holder (Long) of the option a loss of the amount of the premium paid for the option. The seller of the short positions would keep the premiums received for writing the options, thereby realizing a profit.

When determining whether position limit rules have been violated, which option positions on the same underlying security are combined under Option Clearing Corporation Rules? Long puts and long calls. Short puts and long calls. Long puts and short calls. Short puts and short calls. [A]I and II [B]I and IV [C]II and III [D]III and IV

II and III Position limit rules regulate option positions on the same side of the market. Short puts and long calls are both bullish positions, while long puts and short calls are both bearish positions, on the same side of the market.

Regular way settlement of trade date plus one business day (T+1) would apply to which of the following securities? [A]Municipal bond transactions [B]Common stock transactions [C]Listed equity option transactions [D]Corporate bond transactions

Listed equity option transactions Equity options have regular way settlement of T+1. Common stock, municipal bonds, and corporate bonds have regular way settlement of T+2.

Of the options transactions listed below, which one is required to indicate whether the position is "covered" or "uncovered?" [A]Opening Purchase [B]Closing Sale [C]Opening Sale [D]Closing Purchase

Opening Sale

All of the following are advantages to the purchaser of a call option EXCEPT: [A]Limited Risk [B]Hedging [C]Leverage [D]Premium income

Premium income

Mr. Smith is the holder of a put option. He instructs his broker to exercise the option. The broker submits the option exercise notice to the Options Clearing Corporation. The OCC would normally: [A]By using the first-in, first-out method, select another clearing member who is short that series to satisfy the exercise notice.[B]Deliver funds equal to the aggregate exercise price to the exercising holder, Mr. Smith, in exchange for his stock. [C]Assign the responsibility for satisfying the notice to the clearing member which sold the options to Mr. Smith. [D]Randomly select a clearing member who is short that series to satisfy the exercise notice.

Randomly select a clearing member who is short that series to satisfy the exercise notice.

Susan Smith has a large portfolio of blue chip common stocks and is expecting the market value of her stocks to remain about the same or decline modestly in price and would like to improve the rate of return on her portfolio. Which of the following option positions would be best for her? [A]Short Calls [B]Long Calls [C]Short Puts [D]Long Puts

Short Calls

Listed options contracts are standard contracts that are issued by and guaranteed by: [A]The Options Clearing Corporation [B]The Federal Reserve Board [C]The exchange where the option is listed [D]The writers of the option

The Options Clearing Corporation

If a client of yours places an order to buy 100 shares of BCD at a market price of $41 per share and also places an order to sell 1 BCD June 35 call for 7, at what market price will the customer break even? [A]The customer will break even at a market price of $48 per share.[B]The customer will break even at a market price of $42 per share.[C]The customer will break even at a market price of $34 per share.[D]The customer will break even at a market price of $28 per share.

The customer will break even at a market price of $34 per share The customer buys at $41 and sells a call with a premium of 7. B 4,100 - S 700 + Therefore the customer will breakeven at a market price of $34 per share.

The holder of a stock index option upon exercise receives: [A]The out of the money amount x $100. [B]The in the money amount x $100. [C]Securities in the index equal to the aggregate exercise price of the option. [D]The premium paid plus the out of the money amount x $100.

The in the money amount x $100. Upon exercise an investor would receive the difference between the exercise price of the option and the current index (which would be the "in the money" amount) times the multiplier of $100.

Which of the following investment strategies is BEST suited for an investor who believes that the market will have large amounts of volatility in the coming months, but that despite the volatility, the market will remain stable or only go down slightly? [A]The investor should sell short the SPY ETF. [B]The investor should purchase the SPY ETF. [C]The investor should purchase call options on VIX. [D]The investor should purchase an index fund for the NYSE.

The investor should purchase call options on VIX

Assume a client tenders an exercise notice for a call to the OCC on Monday, June 3rd. The OCC assigns the notice to a firm on June 5th. The settlement date for the called stock is? [A]Tuesday, June 4th [B]Wednesday, June 5th [C]Thursday, June 6th [D]Monday, June 10th

Wednesday, June 5th When a call option is exercised, settlement of the stock is 2 business days from the time OCC receives the exercise notice. If the OCC receives notice on Monday, June 3rd, then 2 business days from this would be Wednesday, June 5th.

Escrow receipts are used in connection with which of the following? [A]Hypothecating [B]Dollar cost averaging [C]Underwriting corporate securities [D]Writing call options

Writing call options

An investor who is short a call option on ABC and wants to offset the position would enter: [A]an opening sale [B]a closing purchase [C]a closing sale [D]an opening purchase

a closing purchase

When a customer buys 5 ABC July 45 Calls @ 4.50, it would be known as: [A]a closing purchase [B]an opening sale [C]a closing sale [D]an opening purchase

an opening purchase

The best strategy to hedge a short stock position against the possibility of an increase in the market price of the security would be to [A]buy a call. [B]sell a call. [C]buy a put. [D]sell a put.

buy a call.

All of the following are reasons to write call options except: [A]buy the underlying stock at a price which is below the current market price [B]increase the rate of return on invested capital [C]hedging [D]expecting the price of the stock to remain neutral

buy the underlying stock at a price which is below the current market price

Option writers usually sell puts because they [A]own that particular stock. [B]hope to obtain a long-term gain. [C]have a bullish outlook for the stock. [D]have a bearish outlook for the stock.

have a bullish outlook for the stock

In June, a customer buys 100 XYZ at 35 and writes one XYZ November 30 call for 5. This is his first trade in his cash account. The initial option order must be written as an opening [A]sale uncovered. [B]purchase uncovered. [C]sale covered. [D]purchase covered.

sale covered. The initial option order would be an opening sale - because he is selling (writer) the option covered - because he owns the underlying stock

When a call option is exercised the [A]buyer of the call will deliver 100 shares of the underlying stock at the market price. [B]seller of the call will deliver 100 shares of the underlying stock at the strike price. [C]buyer of the call will deliver 100 shares of the underlying stock at the strike price. [D]seller of the call will deliver 100 shares of the underlying stock at the market price.

seller of the call will deliver 100 shares of the underlying stock at the strike price. When a call option is exercised, the seller of the call is obligated to deliver 100 shares of the underlying stock at the strike price. The buyer of the call will pay the seller the strike price for the 100 shares and the buyer is not required to deliver shares.

What is the maximum loss potential for a customer that is long a put option on a debt security? [A]the difference between the strike price and the market price [B]the difference between the strike price and zero [C]the premiums paid at the time the contract was purchased [D]Unlimited

the premiums paid at the time the contract was purchased