CHAPTER 1 — OPTIONS BASICS
A customer owns 1 ABC July 50 call. ABC is trading at 56, and the customer asks the RR whether the option has time value or intrinsic value. The option is currently quoted at 7, and the customer is also asking whether dividends will adjust the strike price. Which amount represents intrinsic value?
A. $600
B. $700
C. $100
D. $0
What is A. $600?
A customer buys 1 ABC May 40 call at 3. ABC rises to 47 at expiration. The customer ignores commissions and asks for the profit or loss. Which amount is correct?
A. $700 gain
B. $400 gain
C. $300 loss
D. $1,000 gain
What is B. $400 gain?
A customer buys 100 shares of ABC at 50 and buys 1 ABC 45 put at 2. The customer says the put is not for speculation but for downside protection. Which statement BEST describes the position?
A. Covered call
B. Protective put
C. Short combination
D. Ratio write
What is B. Protective put?
A customer buys 1 ABC September 50 call at 6 in a margin account. The option expires in less than nine months. The customer asks how much must be deposited.
A. $300
B. $600
C. $250
D. $0
What is B. $600?
A customer buys $20,000 of marginable common stock in a new margin account. No other positions are held. The customer asks for the minimum Reg T deposit.
A. $10,000
B. $5,000
C. $2,000
D. $20,000
What is A. $10,000?
A customer owns 10 XYZ May 40 calls. XYZ declares a 2-for-1 stock split before expiration. The customer asks what position will appear in the account after the adjustment, and the RR notices the customer is confusing stock dividends with even stock splits.
What is 20 XYZ May 20 calls?
A customer buys 1 XYZ July 60 put at 4 when XYZ is trading at 61. At expiration, XYZ closes at 52. The customer wants the result calculated before deciding whether to continue trading options.
What is a $400 gain?
A customer is long 100 shares of XYZ at 72, buys 1 XYZ 65 put at 2, and sells 1 XYZ 80 call at 3. The customer wants income but also wants a floor under the stock. The account has no other XYZ positions.
What is a collar?
A customer owns 100 shares of XYZ and writes 1 XYZ 60 call. The RR marks the order ticket covered. The customer asks why no uncovered call margin formula is being applied.
What is the short call is covered by the long stock position?
A customer buys $8,000 of marginable stock in a new margin account. The RR remembers there is a minimum initial equity requirement for margin accounts. The customer asks how much must be deposited if the account has no other equity.
What is $2,000?
An investor owns 1 DEF October 60 call. DEF declares a 5% stock dividend before expiration. The customer asks how the contract will be adjusted. Which statement is correct?
A. The customer will own 2 contracts with a strike price of 30.
B. The contract will cover 105 shares with an adjusted strike price of 57.14.
C. The contract will remain unchanged because cash and stock dividends are never adjusted.
D. The customer will own 95 shares with an adjusted strike price of 63.16.
What is B. The contract will cover 105 shares with an adjusted strike price of 57.14?
A customer writes 1 DEF April 35 call at 6. DEF is trading at 39 at expiration, and the option is exercised. The customer has no stock position. What is the writer’s profit or loss, ignoring commissions?
A. $600 gain
B. $400 loss
C. $200 gain
D. $1,000 loss
What is C. $200 gain?
A customer buys 1 ABC 40 call at 9 and sells 1 ABC 50 call at 3. ABC expires at 55. The customer asks for the profit or loss, ignoring commissions.
A. $400 gain
B. $600 gain
C. $300 loss
D. $1,000 gain
What is A. $400 gain?
A customer writes 1 ABC 50 call at 4 when ABC is trading at 52. The account has no ABC stock or long call position. Using the standard uncovered call formula, what is the required deposit?
A. $1,240
B. $1,040
C. $1,400
D. $900
What is C. $1,400?
A customer has a long margin account with stock market value of $60,000 and a debit balance of $28,000. The customer wants to know whether there is excess equity under Reg T. What is the excess equity?
A. $2,000
B. $4,000
C. $8,000
D. $16,000
What is B. $4,000?
A customer wants to exercise an in-the-money equity option on expiration Friday. The customer contacts the firm after the close, and the registered representative reviews the firm’s procedures before accepting the instruction. The customer is not asking about index options or European-style exercise.
What is the customer must submit exercise instructions to the firm by the firm’s cutoff, and the OCC accepts exercise notices from firms until 11:59 p.m. Eastern Time?
A customer buys 1 MNO 70 call at 5 and 1 MNO 70 put at 4. MNO closes at 82 at expiration. The customer says both contracts were expensive, but wants the total result.
What is a $300 gain?
A customer sells 1 DEF 80 call at 8 and buys 1 DEF 90 call at 3. DEF expires at 94. The customer opened the position for a credit and believed DEF would decline.
What is a $500 loss?
A customer sells 1 XYZ 70 put at 5 when XYZ is trading at 68. The account has no short stock or long put position. The firm calculates margin under the uncovered put requirement.
What is $1,860?
A customer has $40,000 of fully paid marginable stock and wants to withdraw cash using margin. The firm applies Reg T initial margin requirements. The customer has no debit balance.
What is $20,000?
A customer is long 300 ABC calls and short 250 ABC puts. The firm is reviewing whether the customer has exceeded position limits. The firm’s system aggregates positions based on the side of the market, not whether the position is long or short. Which statement is TRUE?
A. The positions are on opposite sides of the market and are not aggregated.
B. Only the long calls count toward position limits.
C. The positions are on the same side of the market and represent 550 contracts.
D. Only positions with the same expiration month are aggregated.
What is C. The positions are on the same side of the market and represent 550 contracts?
A customer sells 1 RST 50 put at 7. At expiration, RST is trading at 42 and the put is exercised. The customer has no other position in RST. What is the result?
A. $100 loss
B. $700 gain
C. $800 loss
D. $100 gain
What is A. $100 loss?
A customer buys 1 XYZ 70 put at 8 and sells 1 XYZ 60 put at 3. XYZ closes at 54 at expiration. What is the profit or loss?
A. $500 loss
B. $1,000 gain
C. $500 gain
D. $300 gain
What is C. $500 gain?
A customer sells 1 ABC 40 call at 7 and buys 1 ABC 50 call at 2. The position is opened for a net credit. What is the margin requirement?
A. $500
B. $700
C. $1,000
D. $300
What is A. $500?
A customer has a long margin account with stock market value of $30,000 and a debit balance of $24,000. The customer asks whether the account meets minimum maintenance. Which statement is TRUE?
A. The account meets maintenance because equity is $6,000 and the requirement is $7,500.
B. The account is restricted but not under maintenance.
C. The account is under maintenance by $1,500.
D. The account has excess equity of $1,500.
What is C. The account is under maintenance by $1,500?
A customer owns a listed call option on common stock. The issuer declares a $1 cash dividend, and the customer asks whether the call strike price will be reduced so the call holder receives the benefit of the dividend. The stock goes ex-dividend tomorrow.
What is no adjustment is made for ordinary cash dividends on listed equity options?
An investor buys 100 shares of ABC at 48 and writes 1 ABC June 55 call at 3. ABC rises to 61 and the call is exercised. The customer asks for the total profit, excluding commissions and dividends.
What is $1,000 gain?
A customer establishes a long straddle by buying 1 ABC 50 call at 4 and buying 1 ABC 50 put at 3. ABC closes at 59 at expiration. The customer had expected a major announcement but did not know direction.
What is a $200 gain?
A customer sells 1 MNO 60 put at 6 and buys 1 MNO 50 put at 2. The stock is trading at 57. The customer opened the position in a margin account and asks why the requirement is not based on the current stock price.
What is $600?
A customer has a short margin account with a credit balance of $90,000 and short market value of $60,000. The customer asks how much equity is in the account.
What is $30,000?
A firm receives an exercise notice for 50 ABC calls. The firm’s approved allocation method is random selection, but one customer is short exactly 50 contracts in the same series. Another customer is short 5 contracts and has held the position longer. Which statement is correct?
A. The firm must allocate the notice using FIFO only.
B. The firm must split the notice among all short customers.
C. The firm may never allocate a block exercise notice to a block-size writer.
D. The firm may allocate a block-size exercise notice to a customer with a block-size short position if permitted by its approved procedures.
What is D. The firm may allocate a block-size exercise notice to a customer with a block-size short position if permitted by its approved procedures?
A customer buys 1 ABC September 75 put at 6 as a speculative position. At expiration, ABC is trading at 70. The customer asks why the option can be in-the-money but still produce a loss. Which statement is BEST?
A. The option has no intrinsic value because puts are profitable only above the strike.
B. The option produces a $100 loss because the $500 intrinsic value is less than the $600 premium paid.
C. The option produces a $500 gain because intrinsic value equals profit.
D. The option produces a $600 loss because all long puts expire worthless.
What is B. The option produces a $100 loss because the $500 intrinsic value is less than the $600 premium paid?
A customer establishes an iron condor by selling 1 ABC 45 put at 2, buying 1 ABC 40 put at 1, selling 1 ABC 55 call at 2, and buying 1 ABC 60 call at 1. ABC expires at 57. What is the result?
A. $200 gain
B. $100 loss
C. $300 loss
D. Breakeven
What is D. Breakeven?
A customer sells 1 ABC 50 call and buys 1 ABC 55 call. The short call expires in July and the long call expires in June. The customer argues the long call has a higher strike and should reduce risk. Which statement is TRUE?
A. The spread is covered because the long call has a higher strike price.
B. The spread is covered only if the long call expires before the short call.
C. The long call does not cover the short call because it expires before the short call.
D. The position has no margin requirement because both contracts are calls.
What is C. The long call does not cover the short call because it expires before the short call?
A customer sells short $50,000 of marginable stock in a new short margin account. The customer asks how much must be deposited under Reg T.
A. $10,000
B. $25,000
C. $30,000
D. $50,000
What is B. $25,000?
A customer purchases an option and asks why no certificate is being delivered. The RR explains that listed options are issued and guaranteed through the OCC, and trades are reported through exchange procedures. The customer also asks whether the seller is the issuer of the option contract.
What is the OCC is the issuer and guarantor of listed option contracts?
A customer sells 1 ABC 40 call at 4 and sells 1 ABC 40 put at 5. ABC closes at 51 at expiration. The customer expected little price movement but was wrong.
What is a $200 loss?
A customer buys 1 ABC 50 call at 12, sells 2 ABC 60 calls at 6 each, and buys 1 ABC 70 call at 2. ABC closes at 60 at expiration. The customer describes the position as a neutral strategy using three strike prices.
What is an $800 gain?
A customer sells 1 ABC 80 call at 9 and buys 1 ABC 90 call at 4. ABC is trading at 84. The customer asks for the margin requirement and the maximum loss.
What is $500?
A customer has a short margin account with a credit balance of $80,000 and short market value of $70,000. The firm uses the standard 30% maintenance requirement. The customer asks whether a maintenance call exists.
What is yes, the account is under maintenance by $11,000?
A customer owns 5 ABC June 50 calls. ABC completes a 1-for-5 reverse split before expiration. The customer believes the contracts will become 25 contracts with a lower strike price because that happened in a forward split. What is the adjusted contract?
A. 5 contracts covering 20 shares each at a 250 strike
B. 25 contracts covering 100 shares each at a 10 strike
C. 1 contract covering 500 shares at a 50 strike
D. 5 contracts covering 100 shares each at a 250 strike
What is A. 5 contracts covering 20 shares each at a 250 strike?
A customer buys 1 XYZ 45 call at 6 and later sells it for 11 before expiration. XYZ never trades above 45 while the customer owns the contract, but volatility increases sharply. Which statement is TRUE?
A. The customer has a $500 gain.
B. The customer has no gain because the option never had intrinsic value.
C. The customer has a $600 loss because long calls must be exercised to profit.
D. The customer has a $1,100 gain because the sale proceeds are all profit.
What is A. The customer has a $500 gain?
A customer opens a short straddle by selling 1 MNO 75 call at 6 and selling 1 MNO 75 put at 5. At expiration, MNO closes at 88. Which result is correct?
A. $200 loss
B. $1,300 loss
C. $200 gain
D. $1,100 gain
What is A. $200 loss?
A customer sells 1 XYZ 45 put at 4 and buys 1 XYZ 40 put at 1. XYZ is trading at 43, and the customer has no stock position. Which statement is correct?
A. The requirement is $200 because the short put is in-the-money by 2.
B. The requirement is $300 because the credit is the maximum risk.
C. The requirement is $500 because the spread width is always deposited without adjustment.
D. The requirement is $200 because the spread width minus credit equals maximum loss.
What is D. The requirement is $200 because the spread width minus credit equals maximum loss?
A customer day trades frequently and is classified as a pattern day trader. The customer wants to continue day trading but has equity below the minimum required amount. Which statement is correct?
A. The customer may day trade if the account has at least $10,000 of equity.
B. The customer must maintain at least $25,000 of equity to continue pattern day trading.
C. The customer may satisfy the requirement by buying long options on margin.
D. The customer may ignore the rule if all trades are closed by the end of the day.
What is B. The customer must maintain at least $25,000 of equity to continue pattern day trading?
A customer is long 1 ABC July 50 call and short 1 ABC July 50 put. ABC is trading at 53, and the customer asks whether the positions are on different sides of the market because one is a call and one is a put. The firm is reviewing the account for position-limit aggregation and not for profit or loss.
What is the long call and short put are on the same side of the market because both create a long stock position if exercised or assigned?
A customer owns 100 shares of LMN at 62 and buys 1 LMN 60 put at 4. LMN falls to 48 at expiration, and the customer exercises the put. The customer asks why the hedge did not eliminate the loss entirely.
What is the customer loses $600 because the stock is sold at 60 after being purchased at 62, and the 4-point put premium is also lost?
A customer owns 100 shares of ABC at 48, buys 1 ABC 45 put at 2, and sells 1 ABC 55 call at 4. ABC closes at 39 at expiration, and the customer exercises the put. The customer asks for the total result, excluding commissions and dividends.
What is a $100 loss?
A customer sells 1 ABC 70 call at 6 and buys 1 ABC 80 call at 2. In the same account, the customer sells 1 ABC 70 put at 5 and buys 1 ABC 60 put at 1. The firm is reviewing the margin requirement for both credit spreads together.
What is $1,200?
A customer has a long margin account with stock market value of $80,000 and a debit balance of $50,000. The market value falls to $60,000. The customer asks whether the account is restricted, whether SMA is created by the decline, and whether a maintenance call exists using 25% maintenance.
What is the account is restricted, no SMA is created by the market decline, and there is no maintenance call because equity is $10,000 and maintenance is $15,000?