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Basic Options Chart
- "Buy = DeBit"
- Calls above line, because they are in money when price is above SP; opposite for puts; "Call Up, Put Down."
- Calls: B/E = SP + Prem (Long or Short)
- Puts: B/E = SP - Prem (Long or Short)
-- B/E: CAL and PSH
-- Call Spreads: Add Net Prem to Lower SP
-- Subtract Net Prem to Higher SP
- Debit spread = widen = 5 letters = exercise
- Credit spread = narrow = 6 letters = expire
CALL SPREAD: Lower SP has the higher premium; if lower SP is a long position (buys) --> Bullish- If someone buys the Lower SP --> Bullish
An investor buys 2 LMN 40 calls and pays a premium of 4 each, and also buys two LMN 40 puts and pays a premium of 2.50 each. At the time of purchase, LMN is trading at $40.75. On the expiration date, LMN is trading at $32.50. If the investor closes his position for its intrinsic value. Excluding commissions, the investor realizes a:A) $100 profit. B) $100 loss. C) $200 profit. D) $200 loss.
Which of the following has the least amount of risks?
If an investor buys a LEAPS contract on issuance and allows it to expire unexercised, what is the investor's tax consequence at expiration?
A) Long-term capital loss. B) Long-term capital gain. C) Short-term capital loss. D) Short-term capital gain.
John Chance purchased a DMF May 90 call and simultaneously sold a DMF Jun 80 call. Which of the following best describes John's position?A) A long spread. B) A bull spread. C) A short spread. D) A bear spread.
A customer wishes to close a short option position. The order ticket must be marked as:
A) a closing sale. B) an opening sale. C) an opening purchase. D) a closing purchase.
All of the following are fixed option contract terms EXCEPT the:
A) multiplier in an index option. B) expiration month in a debt option. C) premium in a stock option. D) units of currency in a currency option.
In February, a customer sells 1 GHI Oct 60 put for 3 and buys 1 GHI Oct 70 put for 11. If the customer closes the Oct 70 put before expiration, which of the following statements regarding the resulting profit or loss is TRUE?
A) It is treated as ordinary income or loss. B) It depends on the disposition of the short Oct 60 put. C) It is treated as a capital gain or loss. D) It cannot be determined from the information given
1. Exercise the option
- Buy stock if holding a call; selling stock if holding a put option
2. Let the option expire
3. Sell the option contract before the expiration date
- Profit or loss based upon the option premium
- Called "closing the position."
Sold = the option was sold to someone else (Closed)
Exercise = to use the option as purchased; decided by the buyer
An investor bought 1 Apr KLP 40 call for 6 and 1 KLP Apr 50 put for 8 when KLP was at 45. If the stock declines to 44 and both the call and the put are sold at intrinsic value, the result would be a:A) $100 loss. B) $400 profit. C) $100 profit. D) $400 loss.
When a registered representative opens a new options account, in which order must the following actions take place?
The OCC automatically exercises an open equity option contract if, at expiration, the contract is in-the-money by
Your answer, II and III., was correct!.
Which of the following positions would create the most risk for an investor?A) Buy 100 shares of SSS and sell 1 SSS call. B) Sell short 100 shares of SSS and sell 1 SSS put. C) Sell short 100 shares of SSS and buy 1 SSS call. D) Buy 100 shares of SSS and buy 1 SSS put.
Your answer, Sell short 100 shares of SSS and sell 1 SSS put., was correct!.
With no other positions, a customer sells short 100 TIP at 40 and sells 1 TIP Oct 40 put at $5. At what stock price will the customer break even?A) 35. B) 40. C) 50. D) 45.
Which of the following positions exposes a customer to unlimited risk?
A) Short 2 XYZ calls. B) All of these. C) Short 200 shares of XYZ and short 2 XYZ puts. D) Short 200 shares of XYZ.
Listed options on U.S. exchanges are available on all of the following currencies EXCEPT the:
A) Canadian dollar. B) Japanese yen. C) U.S. dollar. D) Euro.
In March, a customer sells 1 ABC Oct 50 put for 3 and buys 1 ABC Oct 60 put for 11. The customer will experience a pretax profit from these positions if:
The correct answer was: II and III.
Your client with a short call position in the S&P 100 index (OEX) is assigned an exercise notice. The obligation is fulfilled by delivering:
A) 100 shares of each of the 100 stocks in the index. B) cash equal to the difference between the closing value of the index and exercise price. C) a long call in the OEX at the same or lower strike price. D) 100 shares of a particular stock in the index selected by the option holder.
Your customer tells you that she sees the exchange rate for the British pound in the spot market is listed at 148.47. What do you tell her when she asks you what this means?A) $1 equals 1.4847 pounds. B) $1 equals 14.847 pounds. C) One pound equals 14.847 U.S. cents. D) One pound equals $1.4847.
In determining a violation of position limits, short calls are aggregated with:
A) all of these. B) long calls. C) short puts. D) long puts.
A customer is long 10 XYZ Jan 60 calls, and XYZ declares a 20% stock dividend. On the ex-date, the customer will have:
A) 10 XYZ Jan 50 calls (100 shares per contract). B) 12 XYZ Jan 60 calls (120 shares per contract). C) 10 XYZ Jan 60 calls (100 shares per contract). D) 10 XYZ Jan 50 calls (120 shares per contract).
Securities options may be best described as:A) forwards. B) futures. C) derivatives. D) roll ups.
If a customer writes 1 ABC Nov 60 put at 3.50, and the put is exercised when ABC is 57.50, the customer' s cost basis in ABC stock is:A) 54. B) 56.5. C) 60. D) 57.5.
Your answer, 56.5., was correct!.
A customer, long 100 shares of QRS at 62.50, writes 1 QRS Sep 65 call at 1.50. If the call is exercised, which two statements are TRUE?
If a customer buys 300 ABC at 53 and writes 3 ABC June 55 calls at 4, and the contracts expire unexercised the customer's cost basis in ABC stock at expiration is:A) 57. B) 49. C) 53. D) 51.
The correct answer was: 53.
A member firm is assigned an exercise notice by the Options Clearing Corporation. The member firm may assign the exercise notice to its customers by any of the following methods EXCEPT:
A) on a random-selection basis. B) to the customer having the oldest short position. C) to the customer having the largest short position. D) in any way that is fair and equitable.
The premium on the XYZ Jan 30 calls is 3 - 3.15, while the premium on the XYZ Jan 30 puts is quoted at 2.25 - 2.35. A customer establishing a short straddle receives total premiums of:A) 525. B) 550. C) 537. D) 545.
XYZ Corp. has set Friday, January 23rd, as the record date for its next quarterly dividend distribution. To receive the dividend, a customer, long 1 XYZ Feb 40 call, must issue exercise instructions on or before:
A) Friday, January 23rd. B) Tuesday, January 27th. C) Tuesday, January 20th. D) Monday, January 19th.
An investor who is long TCB stock for 6 months buys 1 call on TCB. If the call expires in 8 months and the investor sells the stock 3 months after the call expires, what does he realize on the stock?
A) Short-term gain or long-term loss. B) Long-term gain or short-term loss. C) Long-term gain or loss. D) Short-term gain or loss.
Your clients' option position has been adjusted due to a 2 for 1 stock split. Which of the following regarding this 2 for 1 adjustment is TRUE?
A) The strike price will increase. B) The number of contracts owned will increase. C) The strike price will remain unchanged. D) The number of shares per contract will increase.
The correct answer was: The number of contracts owned will increase.
If a customer buys 1 OXY Oct 50 call at 3, and the holder exercises the option when the stock is trading at 60, what is the cost basis of the 100 shares?
A) 6300. B) 5300. C) 5000. D) 6000.
Your answer, 5300., was correct!.
If a customer is long 1 GGZ Oct 50 call at 11 and short 2 GGZ Oct 60 calls at 5, the maximum loss potential is:
A) 1000. B) 1100. C) 100. D) unlimited.
Which of the following statements regarding the exercise of options contracts are TRUE?
To create a credit calendar spread, an investor should
A customer buys 100 shares of ABC at 56.50 and writes 1 ABC Aug 60 call at 2. If the call is exercised, the consequences are
A customer buys an Oct 79.50 world currency call on the Australian dollar. The Australian dollar spot price is 89.73, and the the option contract size is 10,000 Australian dollars. If the option contract is offered at 11, what was the customer's total premium paid for the contract?
A) 11000 B) 1100 C) 8973 D) 10000
If assigned or closing the position, writers of puts might be required to
If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder?
A) $325 cash. B) $600 cash. C) $600 in stocks. D) $381 in securities.
Which of the following would be in compliance with the CBOE and OCC Rules concerning the nondiscriminatory assignment of an option exercise notice by a firm to one of its customers?A) Assignment to the customer with the largest position in the underlying security. B) Assignment to the customer with the largest position in the option. C) Assignment to the customer with the oldest position in the option. D) Assignment to the customer with the smallest position in the option.
When determining position limits for listed options contracts and LEAPS contracts on the same side of the market, which of the following statements is TRUE?
A) The contracts must be aggregated. B) The contracts do not have position limits. C) The contracts are considered separately. D) The contracts are added to increase the position limits.
A customer buys 1 XYZ Dec 30 call at 7 and sells 1 XYZ Dec 40 call at 1. Two months later, if the customer closes the positions when the spread is trading at a net debit of 9, the customer has:
A) a loss of $100. B) a loss of $300. C) a gain of $100. D) a gain of $300.
Stock Position Limits
- How much?
- 250,000 contracts on the same side of the market
- No more may be exercised within five business day period
- Applies to individuals, reg reps, individuals acting in concert
- Different strike prices but same exp date
- AKA. Vertical spread
- Different expiration dates but the same strike price
- AKA Calendar spread or horizontal spread
- "Timelines are horizontal"
American style options traded on the CBOE are priced higher than European style options on the same underlying stock, having the same expiration because:A) American style options can be exercised at any time until expiration, while European style options can be exercised only at expiration. B) European style options are not adjusted for stock splits and stock dividends. C) American style options traded on the CBOE are guaranteed by the exchange. D) European style option positions cannot be traded out of.
A UK company exports sweaters to the U.S. and will be paid in U.S. dollars on delivery. To hedge foreign-exchange risk using listed currency options, the UK company should:A) sell British pound puts. B) buy British pound calls. C) buy British pound puts. D) sell British pound calls.
All of the following are characteristics of unlisted options EXCEPT:
A) premiums determined by participants. B) negotiated exercise prices. C) active secondary trading. D) negotiated expiration dates
Which of the following are characteristics of the volatility market index (VIX)?
The writer of a combination expects the market to be:A) bullish. B) volatile. C) bearish. D) stable.
A registered representative makes the following comment to his client, "Writing options is a good way to increase your income on this stock." Which of the following should be included with this comment?
A)You are then guaranteed a gain on the stock. B)You may lose future profits and risk of loss is still possible. C)Your stock covers the option, so you cannot lose. D)You will gain the option premium, with no chance of loss.
The correct answer was: You may lose future profits and risk of loss is still possible.
Which option strategy is most similar to entering a buy limit order?
A)Short out-of-the-money call. B)Short out-of-the-money put. C)Long in-the-money put. D)Long in-the-money call.
Your answer, Short out-of-the-money put., was correct!.
An investor buys a yield-based Sept 70 call on a 30-year T-bond for a premium of 2.50. At expiration, if the yield on the most recently issued T-bond is 7.95%, what is the investor's gain or loss?
A)$950 gain. B)$700 loss. C)$700 gain. D)$950 loss.
The correct answer was: $700 gain.
If a customer is long 300 shares of ABC, and writes 5 calls against the position, this is an example of a:
A)straddle. B)partial write. C)ratio write. D)spread.
The correct answer was: ratio write.
An account initially approved only for covered call writing must be reapproved for which of the following?
Your answer, I, II, III and IV., was correct!.
If a customer is short 100 XYZ shares at 54 and long 1 XYZ 55 call at 2, what is the maximum potential loss?
A)100. B)200. C)Unlimited. D)300.
The correct answer was: 300.
Which of the following actions could affect the holding period on a long position in IBS stock?
A)Sale of 1 IBS out-of-the-money call. B)Sale of 1 IBS out-of-the-money put. C)Purchase of 1 IBS call. D)Purchase of 1 IBS put.
The correct answer was:Purchase of 1 IBS put.
All of the following are true about LEAPS EXCEPT they:
A)are available only on index options. B)have a longer life than other listed options. C)may be exercised at any time after execution. D)cease trading at 3:00 pm CT.
Your answer, are available only on index options., was correct!.
Recommendations or projections are permitted in options:
A)none of these. B)Sales Literature and advertising C)sales literature. D)advertising.
The correct answer was: sales literature.
If the strike price of a yield-based option is 62.50, this represents a yield of:
A)0.000625. B)0.00625. C)0.0625. D)0.625.
The correct answer was: 0.0625.
Jerry Avery bought 100 shares of DMF at 30 and two weeks later bought a 9-month DMF put at 4. The put expired. What was Jerry's tax consequence?
A)$400 short-term loss. B)$2,600 loss. C)$400 long-term loss. D)None, the cost of the put is added to the cost of the stock.
The correct answer was: $400 short-term loss.
Which of the following will halt trading in listed options when there is a trading halt in the underlying stock?
A)The SEC. B)The options exchange on which the option is listed. C)The OCC. D)The exchange on which the stock is listed.
The correct answer was: The options exchange on which the option is listed.
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