Options: Equity (Stock) Options
The seller of an DEF Jan 50 call is covered by all of the following EXCEPT: A long 100 shares of DEF stock B long an escrow receipt for 100 shares of DEF stock C long 1 DEF Feb 40 Call D long $5,000 of cash in the account
The best answer is D. If the seller (writer) of a call is exercised, he or she must deliver the stock at the strike price. A seller of a call who does not own the stock is said to be "naked" because, if exercised, that person must buy the stock in the market and deliver it at the strike price - and the market price will be higher (otherwise the contract would not be exercised by the holder). The seller is said to be "naked" because he or she is exposed to unlimited upside market risk. Now if the seller of the call actually owns the underlying stock, then that stock is delivered on an exercise - this "covers" the seller of the call. He or she is no longer exposed to market risk. The stock can be held at the broker or at an OCC-approved depository bank (evidenced by an escrow receipt for the stock). If the seller owns a call that can be exercised to buy the stock at no loss, then he or she is covered as well. Thus, Choice C covers the sale of the Jan 50 Call, because if that contract is exercised, the long Feb 40 Call can be exercised and the stock is purchased at $40, sold at $50, and there is a $10 per share gain. Choice D does NOT cover the sale of the Jan 50 Call. If the call is exercised, the customer must deliver the stock at $50 that he or she does not own, and the price in the market could have risen to an astronomical amount. Thus, a fixed amount of cash cannot be used to cover the sale of a call.
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
The best answer is D. The options cycles are: Cycle 1JanAprJulOctCycle 2FebMayAugNovCycle 3MarJunSepDec 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
The best answer is D. The options cycles are: Cycle 1JanAprJulOctCycle 2FebMayAugNovCycle 3MarJunSepDec 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).
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
The best answer is 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.)
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
The best answer is 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.)
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
The best answer is 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.
The last time to trade expiring equity options is: A 4:00 PM EST on the third Friday of the month B 11:59 PM EST on the last calendar day of the month C 4:00 PM EST on the last business day of the month D on the Saturday following the third Friday of the month
The best answer is A. 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. Review
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
The best answer is 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.
he seller of an ABC Mar 50 call is covered by all of the following EXCEPT: A long 100 shares of ABC stock B long 1 ABC Feb 40 Call C long an escrow receipt for 100 shares of ABC stock D long 1 ABC Apr 40 Call
The best answer is B. If the seller (writer) of a call is exercised, he or she must deliver the stock at the strike price. A seller of a call who does not own the stock is said to be "naked" because, if exercised, that person must buy the stock in the market and deliver it at the strike price - and the market price will be higher (otherwise the contract would not be exercised by the holder). The seller is said to be "naked" because he or she is exposed to unlimited upside market risk. Now if the seller of the call actually owns the underlying stock, then that stock is delivered on an exercise - this "covers" the seller of the call. He or she is no longer exposed to market risk. The stock can be held at the broker or at an OCC-approved depository bank (evidenced by an escrow receipt for the stock). If the seller owns a call that can be exercised to buy the stock at no loss, then he or she is covered as well. Thus, Choice D covers the sale of the Mar 50 Call, because if that contract is exercised, the long April 40 Call can be exercised and the stock is purchased at $40, sold at $50, and there is a $10 per share gain. On the other hand, Choice B does NOT cover the sale of the Mar 50 Call, because it expires in February - a month prior to the expiration of the Mar 50 Call, leaving that contract naked for March. You might ask: "How do you know it is February followed by March, 1 month later and not March followed by February, 11 months later?" Answer - the maximum life of a listed option contract is 9 months, so it can only be the former and not the latter!
Stock options contracts are: A American style and can only be exercised at expiration B American style and can be exercised at any time C European style and can only be exercised at expiration D European style and can be exercised at any time
The best answer is 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 can only be issued based on the cycles set by the Options Clearing Corporation.
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
The best answer is 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).
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
The best answer is B. 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.
Regular way trades of options settle: A same business day B next business day C in 2 business days D in 5 business days
The best answer is 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 trading of listed options contracts C issuance of listed options contracts D assignment of exercises of listed options contracts
The best answer is B. 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 maximum life on a regular stock option contract is: A 4 months B 8 months C 12 months D 24 months
The best answer is B. 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.
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
The best answer is 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.
Which of the following is NOT standardized for listed option contracts? A Strike price B Contract size C Premium D Expiration date
The best answer is 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 Review
The best answer is 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.
A customer owns an ABC Call option. ABC declares a dividend for shareholders on record July 5th. The last day to exercise the option and get the dividend is: A June 30th B July 1st C July 2nd D July 3rd
The best answer is C. 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 5th, which is July 2nd (don't forget to exclude July 4th, since it is a legal holiday!) 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 3rd).
Equity options for a given month expire at: A 4:00 PM EST on the third Friday of the month B 4:00 PM EST on the Saturday following the third Friday of the month C 11:59 PM EST on the third Friday of the month D 11:59 PM EST on the Saturday following the third Friday of the month
The best answer is C. Listed equity options trade until 4:00 PM Eastern Standard Time (EST) on the third Friday of the expiration month. The contracts expire at 11:59 PM Eastern Standard Time that same day - the third Friday of the month.
Regular way trades of which of the following securities settle next business day? A Municipal bonds B Listed stocks C Listed stock options D Corporate bonds
The best answer is C. Regular way trades of listed options securities settle next business day (as do regular way trades of U.S. Governments). Regular way trades of stocks, corporate bonds, and municipal bonds settle 2 business days after trade date.
