Term
| What is the dividend payout ratio? |
|
Definition
Measures percentage of earnings a company pays out in dividends.
Dividends per share / earnings per share = Dividend Payout Ratio |
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Term
| What does earnings per share measure? |
|
Definition
| Total Earnings / Outstanding Shars |
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|
Term
| What is the general divident payout ratio of a public utility company? |
|
Definition
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|
Term
| What is the average payout ratio for a blue chip? |
|
Definition
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|
Term
| What is the average payout ratio for a growth stock? |
|
Definition
|
|
Term
| What is retained earngings |
|
Definition
| Net income - Dividends paid |
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Term
|
Definition
| A Reg A+ offering covers exempt securities - less thatn $75 million in any 12 month period. It is a short registration statement and issuer sends a ciruclar to the public instead of a normal prospectus. |
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Term
|
Definition
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|
Term
| What is a private placment |
|
Definition
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|
Term
| What is "systematic risk" |
|
Definition
| Systematic risk refers to the risk inherent to the entire market or market segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular stock or industry. |
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|
Term
| What is this equation: y = a + bx + u |
|
Definition
y is the performance of the stock or fund.
a is alpha, which is the excess return of the stock or fund.
b is beta, which is volatility relative to the benchmark.
x is the performance of the benchmark, which is often the S&P 500 index.
u is the residual, which is the unexplained random portion of performance in a given year. |
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Term
|
Definition
| Beta measures volatility against a benchmark like S&P. IMPORTANT it represents Systematic Risk |
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|
Term
|
Definition
| Alpha measures the excess return on investments after adjusting for market-related volatility and other random fluctuations |
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Term
| What does a foreign company do to hedge when gettng paid in dollars. |
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Definition
| To summarize, in a foreign currency hedging question, establish the market direction you want for the foreign currency, then do the opposite to protect. Also you can't do options on the US dollar. |
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Term
| What does a corporation do when it wants to open a margin account? |
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Definition
| Whenever a corporation opens an account with a broker-dealer, a resolution by the board of directors, appointing specific individuals who have trading authority must accompany the application. In addition, if the company wishes to open a margin account, the company must also provide a copy of its charter or by-laws as evidence that the company is legally permitted to trade on margin. |
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Term
| What does the MSRB regulate? |
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Definition
| Broker dealers, not issuers. An SRO that oversees the Muni market. Rules enforced by SEC and FINRA. |
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Term
| What happens (tax-wise) if someone buys a muni bond in the secondar market. |
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Definition
| The customer who bought it will have to pay a tax every year on the prorated amount based on the discount. |
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Term
|
Definition
| For government securities and options, the settlement date is usually the next business day, that is, T+1. |
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Term
| Conversion market price forumula |
|
Definition
| Par Value / conversion price. For example, one bond that can be converted to 20 shares of common stock has a 20-to-1 conversion ratio. The conversion ratio can also be found by taking the bond's par value, which is generally $1,000, and dividing it by the share price. A stock trading for $40 has a conversion ratio equal to $1,000 divided by $40, or 25. |
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Term
| What does an investor who is in a long straddle expect from the market? |
|
Definition
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|
Term
| When does the maximum loss occur in a long straddle? |
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Definition
| Note: Because the investor in a long straddle expects volatility, the maximum loss would occur if the stock price was exactly the same as the strike price (at the money) because neither contract would have any intrinsic value |
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Term
| What is the best outcome for an investor in a short straddle? |
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Definition
| The investor with a short straddle would like the market price to close at the money, in order to keep all the premiums. |
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Term
| When is a short put in the money? |
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Definition
| When the market price of the stock is LESS THAN the exercise price. |
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Term
| When is a long put in the money? |
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Definition
| When the market price of the stock is LESS THAN the exercise price. |
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Term
| When is a long call in the money? |
|
Definition
| When the stock is trading above the strike price, it's in the money. |
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Term
| When is short call in the money? |
|
Definition
| When the stock is trading above the strike price, it's in the money. |
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|
Term
| What is an option's intrincis value? |
|
Definition
The number of points it is in the money.
Formula: Strike price - Intrinsic value = Time Value |
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|
Term
| When an option is "at the money" what is the time value? |
|
Definition
| The time value is the value of the premium - that's it. |
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Term
|
Definition
| The amount of PREMIUM which exceeds the value. |
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|
Term
| The "spread" refers to the difference in what? |
|
Definition
| The difference between the PREMIUMS, not the strike prices. |
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Term
| When a spread is done net credit, what is the goal of the investor? |
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Definition
| The investor wants them to expire to keep the premium - the net credit. |
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Term
| When an investor does a debit spread, what is the goal? |
|
Definition
| To close out the spreads to make a profit, because if they expire he loses all the money. |
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Term
| A vertical bull spread is long the option with the (lower or higher option)? |
|
Definition
| Lower. Vertical Bull buys the option with the lower strike price. |
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Term
| A vertical bull put spread is long the option with the (lower or higher option) |
|
Definition
| Lower. Vertical Bull buys the option with the higher strike price. |
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Term
| What is the maximum loss in a debit spread? |
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Definition
| The maximum loss in a debit spread is the net debit in the premiums if they expire; the max profit is the difference between strike prices minues the net debit. You want debit spreads to widen by more than thte net debit to be profitible. |
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Term
| Do you want credit spreads to narrow or widen? What is the max profit potential and max max loss? |
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Definition
| We want credit spreads to narrow or expire. Max loss is the difference between the two strike prices less the net credit in the premiums. Max profit is the net credit in the premiums if the options expire. As an investor, you want net credits to expire so you can keep the premium -- as opposed to net debit, in which cas you want to close the sale to make a profit - sell them. |
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Term
| How do you calculate your break even on a call debit spread and a put debit spread? |
|
Definition
Always calculate your break even from the buying/long position. Call up, put down.
Call= Long exercise price + the net debit of premiums.
Put = Long exercise price - the net debit of the premiums |
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|
Term
| What's a straddle and why is it used? Explain both Long and Short? |
|
Definition
| Buy a Call, Buy a put; or, sell a call, sell a put. All same strikes and dates. Long Used when you expect a Big move that could go either way as the result of a big news event or activity; the short straddle seller thinks the price won't be that much effected and won't move much. |
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|
Term
| What is the loss potential on a short straddle? |
|
Definition
| Short straddles or short combos always have unlimited loss potential. |
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Term
| What premiums do you use to determine break evens in straddles? |
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Definition
| You use the total of BOTH premiums. |
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Term
| Short straddles are profitible when? |
|
Definition
| When they are inside the break events. |
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|
Term
| Long straddles are profitable when? |
|
Definition
| When they are outside the break evens. |
|
|
Term
|
Definition
| Short term - alwasys capital gains, never ordinary income because they are less than 12 months. |
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|
Term
| If you bought a put, how is it taxed if exercised? |
|
Definition
Exercise price minus premium paid = sales proceeds of the stock sold.
Exercise price - sales proceeds = sales proceeds |
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|
Term
| If you wrote/sold a put, how are you taxed? |
|
Definition
| Exercise price of put - premium received = cost basis of stock purchased. |
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|
Term
| Explain constructive sales of appreciated stock positions. |
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Definition
| When you hedge a position trying to avoid a capital gains tax. Creates a new holding period and cost basis as if you sold your stock. |
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Term
| When does the holding period for tax purposes start on a sotkc that is purchased when an option is exercised (long call or short put)? |
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Definition
| The day AFTER the option is exercised. It used to be on the day of the exercise but IRS changed to the day after. FINRA may not have caught up so keep that in mind. |
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Term
| What does short against the box mean and how is it taxed? |
|
Definition
| When an investor is long and short the same amount of the same stock at the same time. Long 100 and short 100 of ABC. This means those two positions could close each other out. So if you are short against the box and write a call on the same stock, it's treated as naked bececause the long stock is already covering the short stock position. |
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Term
| What is the margin requirement for writing uncovered equity options? |
|
Definition
| 20% of the market value of the stock plus the premium for the option. |
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Term
| True or false. An investor has limited loss potential if he sells put options against stock that he has sold short. |
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Definition
| The investor has some protection because he has received premiums but still has unlimited loss potential on the stock position. |
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|
Term
|
Definition
| Used to hedge a well diversified portfolio from market/systematic risk. |
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|
Term
| What to indexed options settle in? |
|
Definition
|
|
Term
| What is a narrow based index option? |
|
Definition
| Made up of nine or fewer securities. - follows a narrow range of industries. |
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|
Term
| What is a broad-based index option. |
|
Definition
| Covers a broad range of industries such as the S&P 500. |
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Term
| What is the CBOE Volatility Index Options (VIX)? |
|
Definition
| They work the opposite way of options and it is a baramoter of near-term investor sentiment. If you think the S&P is going down, you would buy VIX Call options. Remember it's opposite of everything else. It is an option that measures market expectation of 30 day S&P index options. Option on Options on a Feeling. |
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Term
| When do VIX options expire? |
|
Definition
| Expire on the Wednesday that is 30 days prior to the third Friday of the calendar month immediately following the expiring month. THEREFORE, THE LAST DAY A CUSTOMER COULD CLOSE WOULD BE THE TUESDAY BEFORE EXPIRATION OF THE CONTRACT. They expire EUROPEAN style and are based on a february cycle. |
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|
Term
| What does 1 point on the VIX equal. |
|
Definition
|
|
Term
| What does exercise on a VIX option occur? |
|
Definition
| Automatic exercise ocurrs if exercise settlement value is equal to or exceeds strike price on the call. |
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|
Term
| How do you determine the contract value of an index option? |
|
Definition
| Multiply $100 (not shares like we do with regular optoins). |
|
|
Term
| How do you determine how much an index option costs? |
|
Definition
| Premium quote x the index multiplier - just like regular options. |
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|
Term
| When do index options settle? |
|
Definition
| Next business day following exercise date. |
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|
Term
| What is gross settlement? |
|
Definition
| Just what happens between the strike price and index value at the close. Ignore premiums. |
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|
Term
| What is cash settlement for index options. |
|
Definition
An investor is long 1 SPX Aug 600 Put @7 when the index is at 650. The index closes at 550 and he exercises his option. What is the Cash Settlement of these transactions?
Premiums | Stock/Index
B-500 S +600
B - 550 (gets to buy at market, then "put it" to the buyer at the strike price)
So 50 x 100 = $5,000 cash settlement |
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|
Term
|
Definition
| Retail Automatic Execution Systems that executes market and limit orders of up to 50 contracts for public customers in OEX and many equity options. |
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|
Term
|
Definition
| Customizable options offered on CBOE - you can customize exercises price, sytles, dates. |
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|
Term
| What are yield-based interest rate options and how do y ou determine whether to buy calls or puts? |
|
Definition
| Always place your bet in the direction you think interest rates will go up. If you think interest rates are going up, buy call options. Down? Buy put options. They are used for hedging. |
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|
Term
| How do interest rate or yield options settle and when? |
|
Definition
| In cash and European style, at expriration only - the third Friday of the expiration month. |
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|
Term
| What are the expiration months for world currency. |
|
Definition
|
|
Term
| What is the expiration day for world currency options? |
|
Definition
| Third Friday of the expriation month. |
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|
Term
| How do you determine strike prices of world currency options? |
|
Definition
| Take the spot price and move decimal accordingly. My trick: White countries - two decimal to right; Brown coutnries and Sweden: three decimals to right; Japanese Yen: Four digits to right. |
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|
Term
| How do you calculate the premium value on a world currency option. |
|
Definition
| 1 point equals $100. Same as all other options. |
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Term
| If a US investor must make payment in a foreign currency, what would the investor buy? |
|
Definition
| Calls on the foreign currency in case the value of the foreign currency goes up. |
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Term
| If a US investor must accept payment in a foreign currency, the investor would buy? |
|
Definition
| Puts on the foreign currency. And remember, you can't hedge US dollars. |
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|
Term
| What is the Forex Market? |
|
Definition
| Decentralized currency market. Facilitates international trade and is a market for US and Foreign currencies. Helps increase liquidity. The Spot price of each currency is used to determine the value. Opens Sunday 5 p.m. EST closes Friday 5 p.m. EST. |
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|
Term
|
Definition
| It is a basket of foreign currencies that measure the value of the US Dollar against them. |
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|
Term
| Whenever you buy a put, what are you doing? |
|
Definition
| Hedging long stock positions. |
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|
Term
| What is the margin requirement for writing uncovered equity options? |
|
Definition
| Leap options with more than nine months to expiration can be purchased on margin and it is 75% of the premium value. |
|
|
Term
| What are the contract values of equity leaps? |
|
Definition
| Equity leaps represent 100 share of the underlying stock. |
|
|
Term
| What are the contract values of index leaps? |
|
Definition
| Index leaps represent $100 times the value of the underlying index settled in cash. |
|
|
Term
|
Definition
| Up to 3+ years (39 months) on the third Friday of the Expiration Month. |
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|
Term
| Explain the exercise style of OEX, SPX, and S&P 100 LEAPS. |
|
Definition
| OEX and S&P 100 are American style; SPX (S&P 500) are European style. |
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|
Term
| When do Equity LEAPs settle? |
|
Definition
| Equity leaps settle on the second business day following exercise date |
|
|
Term
| When do Index LEAPS settle. |
|
Definition
| Index leaps will settle in cash the next business day following exercise date. |
|
|
Term
| Why would someone buy OEX LEAPS Puts? |
|
Definition
| They would provide a hedge for a large portfolio of large cap equity securities. |
|
|
Term
| Explain the difference between OEX and SPX? |
|
Definition
| OEX is the 100; SPX is the 500. |
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|
Term
| When must option agreements be received by the member firm. |
|
Definition
| Must be received within 15 calendar days (not business days) |
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|
Term
| If an option agreement is not returned in 15 days, what kind of transactions can occur? |
|
Definition
| Only liquidating transactions. Remember, the answer is not to hault transactions (trick) -- only liquidating transactions to close out. |
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|
Term
| What are suitability limits for options? |
|
Definition
| No more than 15% to 20% can be committed to purchasing options. |
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|
Term
| What is the minimum background to obtain from a customer? |
|
Definition
| Investment objectives; employment status; estimated annual income from all sources; estimated net worth; estimated liquid net worth; marital status; dependents; age; experience and knowledge; ability to evaluate the risks (pretty much EVERYTHING!!!!!) |
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|
Term
| What happens if a customer does not respond to the request for verification of background information? |
|
Definition
| The firm can consider that it is verified. |
|
|
Term
| How many days after being approved for options must you send the financial background information to the client for verification? |
|
Definition
|
|
Term
| State the order in which actions must be taken when opening a new options account. |
|
Definition
Proper sequence:
I. obtain essential facts from customer;
II. Get approval of the securities sales supervisor or branch office manager;
III. Enter customer's order;
IV. Obtain a signed options account agreement. |
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|
Term
| What CAN'T you use to cover writing short positions in a Cash account? |
|
Definition
| Convertible bonds and warrants. You could in a margin account but not a cash account. |
|
|
Term
| What kind of options can you buy in a margin account? |
|
Definition
You can buy calls and puts; however, 100% of premiums are required. So you can buy them but just not on margin (unless it is a LEAP with more than 9 months).
You can write covered calls and puts in a margin account but you can only do spread positions and you can only write uncovered calls and puts with a margin deposit |
|
|
Term
| What are portfolio margin accounts? |
|
Definition
| Use quantitative models - for high net worth individuals. |
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|
Term
| In a trust account, what must you examine before exercising options? |
|
Definition
| The trust agreement to make sure the trustees are empowered to trade options in the trust account. |
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|
Term
| Show the order of approving an options agreement. |
|
Definition
| Obtain facts; provide ODD BEFORE the account is approved for options trading; get the account approved by a SSS or ROP. If approved by a SSS first, an ROP must approve within 10 biz days. Then the agreement must be received in 15 calendar days. Then within 15 days of the account being approved for options trading, you must send the client the background to verify. |
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|
Term
| What do confirmations NOT have to show? |
|
Definition
| Trading volume or a limit price. |
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|
Term
| How long does a BD have to keep a written option complaint? |
|
Definition
| Four years (used to be three so be careful if an old test question shows up) |
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|
Term
| When is pre-approval of sales literature and worksheets not required? |
|
Definition
| Usually an ROP must approve, but if being sent to institutional clients, no pre-approval is required. |
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Term
| Who needs to approve advertising and sales literature to prospects who have not received an ODD and what is the timing of this approval? |
|
Definition
| FINRA must approve 10 calendar days prior to first use. |
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|
Term
| What are the rules regarding correspondence? |
|
Definition
| Does not need to be approved by an ROP unless it is sent to more than 25 retail clients within a 30 day period and the correspondence makes an investment recommendation or promotes the services of the firm. |
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|
Term
| What are rules for option communications re: marketing. |
|
Definition
| Must be limited to general descriptions; must not contain recommendations or projected or past peformance or name a specific security. Must contain contact info to obtain the ODD. |
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|
Term
| How do you calcluate the break even on a debit call spread? |
|
Definition
| Long Exercise price + net debit of premiums |
|
|
Term
| How do you calcluate the break even on a a debit put spread? |
|
Definition
| Long Exercise price - net debit of premiums |
|
|
Term
|
Definition
| Buyers pay the ask price, sellers receive the bid price. |
|
|
Term
| Explain how to adjust for stock dividend in an option. |
|
Definition
| Value of stock before dividend / # new shares generated = new strike price. |
|
|
Term
| What is the settlement day for an option that is bought or sold? |
|
Definition
| Next business day following the trade date. |
|
|
Term
| What is the settlement day for an exercise of an option? |
|
Definition
| Two business days from the time the OCC receives the exercise notice. |
|
|
Term
| What should you ignore when determining intrinsic values of options? |
|
Definition
| Whether they are long or short, and ignore the premiums too. And the investor. The investor is not in the money -- the contract is. Fight the urge to think about short/long investor. Focus on contract. |
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|
Term
| How do you determine breakeven on debit spreads? |
|
Definition
| Breakeven on debit spreads is determined from the long position. |
|
|
Term
| What does a spread look like? |
|
Definition
| spread = BS (buy a call, sell a call) |
|
|
Term
| What is the last day and time an option can be exercised? |
|
Definition
| 5:30 p.m. eastern on the third Friday of the expiration month. |
|
|
Term
| What do long puts do? Who is obligated if exercised? |
|
Definition
| Long puts lock in a price at which stocks can be SOLD, not purchased to cover. The seller is obligated to buy from the buyer of the put at the strike price. |
|
|
Term
| What options strategy is best if an investor wants to maintain a long position in the market while getting max protection from downside? |
|
Definition
| Buying Puts. Buy a put because you are protected to zero. |
|
|
Term
|
Definition
| Stop and buy if it gets to high. Order placed above market price. You don't want to miss out. |
|
|
Term
|
Definition
| If the "limit" gets "low" let's go! (and buy the stock cause you think it might go back up) |
|
|
Term
|
Definition
| Stop and sell if the damn price fell (order placed below current market price). |
|
|
Term
|
Definition
| I will tell you to sell just below the high. A stock is on its way back up. You expect it to get to 15 tops. It's at 10 today. Set your sell limit at 13. |
|
|
Term
| Who most often issues Serial Bond Issues? |
|
Definition
| Municipalities and corporations for the purpose of corporate trust certificates. |
|
|
Term
|
Definition
| A bond issue with differing m |
|
|
Term
| How do you get current yield on a common stock? |
|
Definition
| Annual Divident/Market price = current yield |
|
|
Term
|
Definition
A statement of money owed to adjust for incorrect dividend payments. |
|
|
Term
| Investor owns 200 shares of ABC common stock purchased at $50 per share. ABC pays a 5% stock dividend. How many shares will the owner now have? What will be the new market price of the stock now? |
|
Definition
A: 200 x 5% = 10 new shares so: 210 shares
B: Original Value of shares/new number of shares. so: $10,000/210 = $47.62 |
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|
Term
1. Short uncovered call is the:
A. Most speculative position possible
B. Least speculative position |
|
Definition
| Answer: The MOST speculative. The loss potential is unlimited. |
|
|
Term
A short covered call is the:
A. Least Conservative
B. Most Conservative |
|
Definition
| Answer: Most conservative possible. |
|
|
Term
| Short Straddles or Short Combos always have.... |
|
Definition
| Unlimited Loss Potential. Because it is always assumed that the short call is uncovered. |
|
|
Term
| Tre or false: Convertible bonds and warrants can be used to cover writing (short) positions in a cash account. |
|
Definition
| False. You could do this in a margin account, but NOT a cash account. |
|
|
Term
| What prospectus prohibits predictions and projections? |
|
Definition
|
|
Term
| What must be in a text box in an advertisement for a mutual fund? |
|
Definition
STT - Standardized Performance Information;
Max Sales Charges
Operating Expenses |
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|
