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8. Series 57 Options
FINRA Series 57 Exam - Option Contracts and Strategies
| Question | Answer |
|---|---|
| time weighted averaged quoted spread of greater than $0.015 during the evaluation period, the minimum pricing increment is For an NMS stock quoted at $1 or greater that has a | $0.05. |
| time weighted averaged quoted spread of equal to or les than $0.015 during the evaluation period, the minimum pricing increment is If a warant is traded on Nasdaq, must the market | Yes, quotes on warants must be firm. |
| shares of XYZ stock at $30. At 10:30am, another customer enters an order to purchase 10 shares of the same stock at $31. Which order has priority? For legal or regulatory reasons, a market maker can | shares. Up to 60 days. |
| fifiled? An imbalance-only (IO) order is entered to buy 10 | Be executed at $12.39. |
| at les than $0.01 is A stock is quoted at $10.50-$10.60. If a sel order is | $10.50. The taker of the liquidity receives the price improvement. |
| hour or two, the most comon reason is What price action in the S&P 50 Index trigers a | A 7% decline from the prior day's close, betwen the market open (9:30 am) and 3:25 pm. |
| must exercise when giving clients direct market aces should be designed to prevent Which securities are on the threshold security list? | Securities with significant outstanding failures-to-deliver. |
| violation? A trader places orders to buy and sel OTC stocks, | bid-ask spread. Spofing or layering. |
| stocks qualify as established, for purposes of avoiding one year. peny stock suitability statements on solicited trades? What type of peny stock order, received from a retail | Unsolicited orders. |
| the lead underwriter to the isuer detail? Is an underwriter more likely to exercise the | The grenshoe is generaly exercised when the stock price rises folowing the IPO. |
| grenshoe option in an ofering? Who can exercise a grenshoe option to upsize an | Generaly, only the lead underwriter. |
| Which type of stock is not registered under the '3 | subject to volume limits set by Rule 14. Restricted stock and restricted control stock. |
| position when tendering shares? Can shares be tendered if an investors exercises cal | Yes |
| stock alowed to begin quoting prices in it? Under Rule 14, control stock is subject to | Volume limits. |
| Which participant in a listed option trade pays a | The cal or put buyer, who is long. The premium is paid to the cal or put seler (writer), who is short. |
| premium? A trader is bearish on a stock that she does not own. | Buy a put option. |
| She wants to profifit from any sharp decline in its price. What option position could achieve this objective? An investor owns 50 shares of stock curently priced | Write 5 cal options on the stock with a strike price of $50. Each option is equal to 10 shares of the stock. The |
| at $42 per share. The investor would like to sel the stock if it rises to $50 and also receive income from the position. What option position would work best? The main advantages of CBOE listed options, | option seler receives premium income, but upside potential is caped at $50, the same as seling the stock at $50. Standard contract terms and reduced counterparty risk. |
| When do listed options contracts expire? | The third Friday of the expiration month at 5:30 pm et. |
| Who is the counterparty to al CBOE listed option | The Options Clearing Corporation (OC). |
| contracts? A June 50 CBOE cal option on ABC Co. stock wil | This cal is out-of-the-money because the strike price is above the stock price. (For puts, it is the oposite.) |
| expire in two days. The stock price curently is $48 per share. Is it in-the-money or out-of-the-money? Definition of a CBOE trading permit holder | A party authorized to trade options on the CBOE. A CBOE flor broker can acept orders only from registered |
| From whom can a CBOE flflor broker acept options | broker-dealers and trading permit holders. Orders can be acepted only from registered broker-dealers and CBOE trading permit holders. |
| to buy or sel listed options? An investor has sold 5 cal options on XYZ stock. | $28.50. |
| They were writen when the stock price was at $28 and have a strike price of $25. The premium was $3.50 per option. What is this investor's breakeven? An investor sels 4 put options on ABC Co. stock | $52.0 |
| with a strike price of $5. The premium is $3. At what stock price would the investor breakeven? How do you calculate the breakeven share price on a | Subtract the premium paid from the strike price. |
| long CBOE put option position? How does the breakeven of an option change as the | . The breakeven does not change. |
| market value of the stock changes? An investor writes an ABC cal option. To establish a | Buy an ABC cal option, with a diferent combination of expiration and/or strike price. |
| spread position, what else should the investor do? An investor creates a short stradle using listed | Stays flat, as both options will expire and the investor will get the kep al the premiums received for writing |
| options on ABC stock. The stradle will produce maximum profifit if ABC What is the maximum los an investor can realize in a | the options. The sum of two premiums paid. |
| long stradle? An investor buys a cal option with a strike price of | For cals, the lower strike price (option writen at $85) is dominant. |
| $90 and simultaneously sels the same cal with a strike price of $85. Which position is dominant in this cal spread? An investor buys a put option with a strike price of | For puts, the higher strike price (option writen at $50) is dominant. |
| $45 and simultaneously sels the same option with a strike price of $50. Which position in this put spread is dominant? In a debit spread, an investors maximum los is | The net premium paid. |
| In initiating an options credit spread, the investor sels | The dominant position, which is the option with the higher premium. |
| which position? How do premiums and trading comisions fifigure | Include the net premium but not trading comisions in the calculation. |
| into calculating the breakeven point for option spreads? An investor goes long an ABC 75 put at a premium of | $6. Put down the dominant position (which is the put with the higher strike price) to find the breakeven point: |
| $12 and sels an ABC 60 put at $3. The net premium is $9. Where does this spread position breakeven? Another name for a bear cal spread is | $75 - $9 = $6. A credit spread. |
| An investor sels a cal option with a low strike price. | Buy a cal with a higher strike price. |
| What other option would be paired with this position to create a bear cal spread? If both sides of a debit cal spread expire worthles, | A los equal to the net premiums on the two legs of the spread. |
| cal spread is If both sides of a credit cal spread expire worthles, | cost of initiating the position is les than net gain on closing the position. Profit equal to the net premiums on the two legs of the spread. |
| the outcome for the investor is In a vertical spread, the main diference betwen the | Diferent strike prices. |
| two contracts is What is the main diference betwen the long and | The expiration months are diferent. The strike prices are the same. |
| short sides of a horizontal spread options position? Two other names for a horizontal spread options | Calendar spread and time spread. The strike prices of the two legs are the same and the expiration months are |
| position are What type of options spread position has diferent | diferent. Diagonal spread. |
| strike prices and expiration months for the two legs? The total number of options contracts required to | Four contracts. Two of the contracts are identical. The options have 3 diferent strike prices and al have the |
| initiate a buterflfly spread position is In a long buterflfly spread, an investor writes an ABC | same expiration date. Another cal writen at 35, a cal bought above 35, and a cal bought below 35. There are four options in total, |
| cal at a strike price of 35. What other positions will complete the spread? In a buterflfly spread, an investor goes long one | two of which (the cals) are the same. None. Al options in a buterfly spread have the same expiration date in the same clas option (cal or put). Two |
| November 45 cal option. How many other expiration dates, at most, can be included in the total buterflfly spread position? A stradle consisting of options with two diferent | options are bought and two are writen. A strangle or a combination. |
| strike prices is caled What does the VIX index measure? | The implied volatility in the market. A higher VIX normaly indicates higher market volatility and risk. |
| Under what circumstance can an ERISA-regulated | When options trading is permited in the plan's documents, such as the Investment Policy Statement (IPS). |
| retirement plan use options in its investment and trading strategy? The venue that reports CBOE options trades is the | Options Price Reporting Authority (OPRA). |
| limit rules are What foreign curency (FX) options position gives | Buying put options on the foreign curency. These options will profit to the extent that the foreign curency |
| US investors maximum protection against the short- term devaluation of a foreign curency vs. the US dolar? The typical contract size of a foreign curency option | declines against the US dolar. 10,0 units of foreign curency. However, it is 1 milion units of curency for the Japanese yen FX contract. |
| is Can standard options contracts be purchased on | No, standard options contracts canot be bought on margin |
| margin? The amount of cash required to buy six September put | $1,80. 6 options X 10 shares per option X $3 premium per share = $1,80. Remember that standard options |
| options on ABC stock, with a strike price of 45 and a premium of $3, is An investor holds 50 shares of XYZ stock in her | contracts canot be bought on margin and instead must be paid for in ful. $1,950. She is receiving $1.50 per share X 10 shares per option X 5 contracts = $750. $1,20 + $750 = |
| For investors, what is the benefifit of buying or seling | AON (al or none) instructs the broker to fil the whole order or none at al at the limit price or beter. It?s a |
| CBOE listed stock options using AON limit orders? How are listed option contracts impacted by a cash | way of preventing a partial fil, which might not met the ful purpose of the options position, e.g., a covered cal or long put to protect long stock. Listed options are not adjusted for ordinary cash dividends. |
| 10 shares to 150 shares per option? An investor owns 1 ABC Nov 50 cal, which | and the strike price is reduced proportionately. 1 ABC 3 Nov cal for 150 shares. Note that for an od split, the size of the contract is increased by the |
| undergoes a 3:2 split. After the split, the investor will own An investor is long 4 ABC July options with a strike | amount of the split and the strike price is reduced proportionately. Only contract value. The number of contracts will become 8 and the strike price will become $40. Like the |
| stock dividend, use the same method as in adjusting for An ABC put option contract (10 shares) has a strike | 105. Then, divide total contract value by 105% to find the new strike price. 10 shares per contract. 59.09 strike price. Total contract value is 10 X 65 = 650. 650/ 10 shares per |
| listed options Individuals who work on the options exchange flflor | CBOE flor brokers |
| orders from An investor buys a cal option at a strike price of $60 | $63.50 |
| for a premium of $3.50. The breakeven price is An investor buys a put option at a strike price of $45 | $43 |
| for a premium of $2. The breakeven price is An investor owns 1,0 shares of ABC Corp. stock | Sel 10 ABC cal options. |
| and wishes to use them in a covered cal position. What action will achieve this objective? An investor owns 10 shares of stock and creates a | $60 |
| covered cal position by writing 1 cal option against them. Asuming the stock price is $23, the strike price is 25, and the premium received is $4, what is the maximum gain on this position? What objective does an investor pursue in writing | Curent income |
| covered cal options? When an investor writes a covered cal, at what | It ocurs if the stock price goes to zero, in which case the investor loses the stock's ful value, les the option |
| market value do they sufer maximum los? A vertical spread is created in options when | premium received. The strike prices of options are diferent, but the expiration months are the same. |
| An investor buys two options contracts with the same | A horizontal (calendar) spread. |
| strike prices but diferent expiration months. This is an example of what type of spread? In options trading, what defifines a diagonal spread? | Both the strike prices and expiration months of options contracts are diferent. |
| An investor with a debit cal spread will incur a los | Both options expire worthles. |
| of the net premiums when Investors who establish debit cal spreads limit their | The strike price of the short cal. |
| potential upside. Specifificaly, they give up any profifit potential above A bear cal spread is established with two positions. | Buy a cal with a higher strike price. |
| One is to sel a cal with a low strike price. The other is to A debit put spread ocurs when an investor buys a put | Sels a put contract with a lower strike price. |
| contract at one strike price and simultaneously In a credit option spread, the investor is hoping that | Narows. |
| the spread betwen options premiums In an option spread, is the position with the higher | The one with the higher premium. |
| premium or lower premium dominant? An option stradle position in which the contracts | A strangle or combination. |
| have diferent strike prices is caled In a long stradle option position the investor wil | Is volatile in either direction. |
| profifit when the underlying stock In options trading, a short stradle position expreses | Not move much in price, i.e., be relative flat. |
| a view that the underlying stock will How would an investor use VIX index options as a | The investor would go long VIX index options, i.e., buy cals. The VIX index moves inversely with the |
| kind of insurance for a portfolio of stocks held long? A buterflfly spread option position requires how many | market. Four. Al four contracts have the same expiration, and they have thre diferent strike prices. |
| contracts? When is an ERISA retirement plan alowed to trade | When options trading mets the investment criteria of the plan. |
| exercised? There are thre exceptions to the CBOE?s position | Delta hedging, firm facilitation, and market-making. There is no exception based on dividends. |
| limits, which govern how many options contracts an investor may control. They are The maximum number of options contracts an | The CBOE's position limits. |
| consolidates, and diseminates options market data from options exchanges? How could an investor use curency options contracts | Buy put options on euro options contracts. |
| to protect against a decline in the euro vs. the dolar? An investor buys one cal option on ABC stock with a | The value will not change. After the split, the contract will control 30 shares of the stock (vs. 10 pre-split) |
| strike price of $60. If the stock then splits 3-for-1, how will the value of the contract change after the split? How many shares would an OC equity option | and have a strike price of $20 (vs. $60 pre-split). 150 shares. 10 shares before the split becomes 150 shares after the split. The strike price would be 2/3 as |
| contract represent after a 3:2 stock split? An OC equity option has a strike price of $35 and | much as pre-split. $4. A stock split impacts the number of shares per contract and the strike price, but it does not impact the total |
| sels at a premium of $4 just before the stock splits 3:1. What would you expect the premium to be just after the split? Can standard options contracts be purchased on | value of the contract or the premium. No, they must be paid for in ful. |
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