Options and Recommendations (Suitability)

Question 1

Long Call

Answer 1

Choice to buy the stock

Question 2

Short Call

Answer 2

Obligation to sell the stock (at STRIKE)

Question 3

Long Put

Answer 3

Choice to sell the stock

Question 4

Short Put

Answer 4

Obligation to buy the stock (at STRIKE)

Question 5

Settlement for Options

Answer 5

T + 1

Question 6

Resulting Stock Trade (settlement) after Options Settlement

Answer 6

T + 2

Question 7

Premium [equation]

Answer 7

Intrinsic Value + Time Value

Question 8

OCC

Answer 8

Options Clearing Corporation: The Issuer and Guarantor of all options contracts

Question 9

Exercise Styles

Answer 9

American Style: Exercise at any time (common for equity options contracts)
European Style: Exercise on last trading date at expiration (common for non-equity options contracts)

Question 10

Index Options Settlement

Answer 10

T + 1

Question 11

Resulting Exercise of Index Options Settlement

Answer 11

T + 1

Question 12

Opening Purchases

Answer 12

Used to establish/add to a long position
(remember: Purchase = Buy = LONG)

Question 13

Opening Sales

Answer 13

Used to establish/add to a short position
(remember: Sale = Sell = SHORT)

Question 14

Offsetting (to an Opening Purchase/Sale) / Closing Purchase or Sale

Answer 14

Closing Purchase is used to eliminate a short position
Closing Sale is used to elimiate a long position
(remember: OPPOSITE of Opening Purchase/Sale)

Question 15

If a contract does not have Intrinsic Value, the option will…

Answer 15

Expire Worthless

Question 16

If a contract has Intrinsic Value, the option will…

Answer 16

Be exercised

Question 17

Position Limits apply to…

Answer 17

The same side of the market

Question 18

Class

Answer 18

Stock + Type of option (call or put)

Question 19

BUY SIDE of the market is also known as…

Answer 19

The Bullish Side: consists of Long Calls and Short Puts

Question 20

SELL SIDE of the market is also known as…

Answer 20

The Bearish Side: consists of Short Calls and Long Puts

Question 21

LEAPS

Answer 21

Long-term Equity Anticipation Securities: Technically 39 months, but 30 months in practice. LEAPS are the only contracts that may qualify for long-term option contracts

Question 22

True or False: Longer term options contracts always have lesser premiums.

Answer 22

False
(remember: Longer = Better)

Question 23

True or False: Yield-based Options have a direct relationship to interest rates

Answer 23

True
(remember: Yield always correlates to Interest Rates)

Question 24

Strategy: Protective Put for Equity/Index Options

Answer 24

Gives the ability to participate in a big price increase, but not participate in a price decline

Question 25

Strategy: Covered Call and Put Writing for Equity Options

Answer 25

Generate additional income and/or supplement dividend income

Question 26

VIX

Answer 26

Volatility Index

Question 27

For Advanced Options Strategies, you are either buying or selling...

Answer 27

Volatility If you're LONG CALL / SHORT PUT, you're buying UPWARD VOLATILITY If you're LONG PUT / SHORT CALL, you're buying DOWNWARD VOLATILITY

Question 28

What is the max loss in a Long/Debit Spread?

Answer 28

Debit

Question 29

Debit call spread is BULLISH / BEARISH

Answer 29

Bullish

Question 30

Debit put spread is BULLISH / BEARISH

Answer 30

Bearish

Question 31

What is the max gain in a Short/Credit Spread?

Answer 31

Premium

Question 32

Credit call spread is BULLISH / BEARISH

Answer 32

Bearish

Question 33

Credit put spread is BULLISH / BEARISH

Answer 33

Bullish

Question 34

What are the important components of Straddles?

Answer 34

1) Identify the straddle (Long or Short) 2) Calculate the breakevens 3) Determine where the straddle is profitable (Short-Inside, Long-Outside; aka SILO) 4) When do you use a straddle?

Question 35

What are the important components of Spreads?

Answer 35

1) Identify the spread (Long or Short) 2) Identify if the spread is Debit or Credit 3) Determine whether contracts want to Expire or Exercise 4) Determine if difference in premiums Narrow or Widen 5) Find MAX GAIN and MAX LOSS 6) Calculate the breakevens (Call: Add to Lower; aka CAL, Put: Subtract from Higher; aka PUSH) 7) Determine Bullish or Bearish (remember: Larger premium DOMINATES the position)

Question 36

For Spreads, which identifiers always go together?

Answer 36

1) Credit, Expire, Narrow (CEN) 2) Debit, Exercise, Widen (DEW)

Question 37

Naked/Uncovered Call

Answer 37

Agree to sell stock you don't own

Question 38

True or False: Naked/Uncovered Calls hold limited risk.

Answer 38

False: ALWAYS UNLIMITED RISK

Question 39

True or False: Naked/Uncovered Puts hold limited risk.

Answer 39

True: Breakeven to 0

Question 40

Call Breakevens [equation]

Answer 40

Strike + Premium

Question 41

Put Breakevens [equation]

Answer 41

Strike - Premium

Question 42

Stock + Options: Covered Call Breakeven [equation]

Answer 42

Stock Cost - Premium

Question 43

Stock + Options: Protective Put Breakeven [equation]

Answer 43

Stock Cost + Premium

Question 44

Straddle: Upside Breakeven [equation]

Answer 44

Strike + TOTAL Premiums

Question 45

Straddle: Downside Breakeven [equation]

Answer 45

Strike - TOTAL Premiums

Question 46

Spread: Call Breakeven [equation]

Answer 46

Lower Strike + NET Premium (remember: Call = add to lower)

Question 47

Spread: Put Breakeven [equation]

Answer 47

Higher Strike - NET Premium (remember: Put = subtract from higher)

Question 48

Options contracts can either be...

Answer 48

Traded, Exercised, or Expired (remember: TEE)

Question 49

What are the tax treatments for TEE?

Answer 49

Traded: ALL short term Exercised: Follows Breakeven (remember: Cost Basis = Breakeven) Expired: ALL short term (exception of LEAP, which is long-term)