Conduct and Practices Handbook Course (CPH) Quiz 37

This evaluation involves four main considerations:
(i) the program’s economic soundness(II) the general partner’s talent, knowledge, and expertise(iii) the program’s basic objectives(iv) the DPP’s start-up costs

Listed options are options traded on an exchange, and thus are also called exchange-traded options. Consequently, listed options are required to follow exchange rules

Equity options are contracts that provide the right to buy or sell an equity security, such as a stock, at a given price (the strike price), independent of the actual market price for the stock at that time. _____________________________________________________________________________________

Listed options can be classified as either American style or European style options, with European style options (the less common style) having a smaller timeframe in which they can be exercised.

The exercise price is the price at which the holder of the option can buy or sell the underlying instrument, regardless of the market price. (The gain or loss by the investor depends upon the difference between the exercise price and the actual price.)

A long position is a position where the trader wants the price to increase. Naturally, then, every single option contract involves one person in the long position and another in the short; someone will profit from the price growing and the other from the price dropping.

A short position is a position where the trader wants the price to decrease. The seller will be in ashort position. And if a trader buys a put option, he is in a short position with respect to the underlying asset, since he wants the actual price to go down, so that he can sell high and buy low.

Option assignments are notices received by the writers (i.e. sellers) of options, informing the writer that the buyer has now exercised the option. Thus, if the option is a put option, then an assignment means that the writer is at that point obligated to buy shares from the option-holder at the strike price.

Exercising an option is activating the right contained in the option contract. If a trader exercises a call option, he is at that point entitled to the underlying securities at the strike price.

American-style exercising means that, at any time before the option has reached its expiration date, the option-holder is able to exercise it. There are not restrictions on when he can exercise it besides the expiration date.

European-style exercising means that the only time when the option-holder may exercise the option is at the expiration date. Option-holders are prohibited from exercising these options prior to the expiration date.

Volume is the number of option contracts that have been traded in a certain time period. It helps to show how meaningful price differences are

Position limits are restrictions placed upon the number of options contracts an investor can hold with respect to a particular security. It is possible for investors to hold a long position on one option contract, and then, with respect to the same asset, hold a short position on a different option contract.

Exercise limits are restrictions placed upon the number of option contracts an investor can exercise for a given security in a given time period.

For instance, suppose a call option permitted the holder to purchase 100 shares of company X at $30 per share, and company X then issued 5% stock dividends. This call option would now permit the holder to purchase 105 shares according to the contract, a 5% increase from 100 shares. Yet, the price per share would decrease to $28.57 ($30/share x 100 shares / 105 shares).

Since stock splits involve multiplying the quantity of stocks and dividing their value (whether twofold, threefold, or whatever), this could potentially wreak havoc on options contracts. Imagine an investor who had an option to buy various stocks which suddenly were halved, even though the value of the company did not meaningfully change; he would experience unnecessary and great losses.

Options margin refers to the minimum amount of cash required to be deposited in an options trading broker account for the trader to begin trading options.

Suppose an investor has a number of stocks which have done well over the previous few years, increasing by 30% or so in value. If he is concerned about the price peaking and dropping, he can purchase a put option to ensure that he will not experience losses in selling those stocks should the price drop. This is called hedging for equity

A bearish investor thinks stock will decline in price and might therefore be a short seller, borrowing shares he doesn’t own and hoping to replace them with stocks bought at a lower price down the road. To protect against the risk of loss, a short seller can use options. For partial protection, the short seller can sell a put against the same stock. For full protection, the short seller can buy a call on the same stock.

For short-term protection, the investor can write a call on the stock, giving someone else the right to purchase it for lower than the market price. This limits their upside potential, and is only advisable for stock with low volatility.

A spread is a pair of options transactions an investor makes at the same time and on the same security. Investors use straddles to protect their positions and to take advantage of discrepancies in options pricing.

A representative associated with a member may register as a Limited Representative – Corporate Securities if he has passed a corresponding Qualification Examination and his activities involve the solicitation, purchase, or sale of securities other than municipal securities, option securities, redeemable securities, variable contracts of certain insurance companies, and direct participation programs.

A debit spread is a spread used by an investor who’s bearish, purchasing a higher-priced option and selling a lower-priced option.

In any spread, the person who sells the lower strike price and buys the higher strike price is bearish, and the investor who sells the higher strike price and buys the lower strike price is bullish.

Straddles are a kind of spread where the investor either purchases a call and a put or sells a call and a put, with both having the same expiration date and strike price. An investor who expects a stock’s price to move up or down substantially, but isn’t sure which way it will go, will use a long straddle by buying a call and a put.

Combinations are similar to straddles, except that they don’t necessarily involve an identical expiration date and strike price.

A representative associated with a member may register as a Limited Representative – Private Securities Offerings if his activities involve effecting sales as part of certain primary non-public offerings but not the sales of municipal, government, or equity interest or debt of direct participation programs. Such person also must pass a corresponding Qualification Examination.

Rule 472 states that a member firm may not publish any communication which Contains:

* An untrue statement or omission of a material fact that is false or misleading.
* The promise of a specific result or return.
* An exaggerated or unwarranted claim.
* An opinion that does not have a reasonable basis.
* A projection or forecast that is not clearly labeled as a forecast.

Traditional IRAs allow for tax deductible contributions, and the investments in them grow tax-deferred, but distributions are taxed. In other words, someone placing contributions in his Traditional IRA can deduct that amount from his taxes for that year, and he doesn’t have to pay any taxes on capital gains (or dividends, or interest income, or whatever) which his investments earn.

Roth IRAs have after-tax contributions, but grow tax-free and have tax-free distributions. After the contributions are made, no taxes ever have to be paid on the account.