ABOUT THE SERIES 4 EXAM XIII
ABOUT THIS BOOK XVII
ABOUT THE TEST BANK XIX
ABOUT THE SECURITIES INSTITUTE OF AMERICA XXI
CHAPTER 1 OPTION BASICS 1
Option Classification 1
Option Classes 2
Option Series 2
Bullish vs. Bearish 2
Possible Outcomes for an Option 3
Characteristics of All Options 4
Managing an Option Position 4
Buying Calls 5
Selling Calls 6
Buying Puts 8
Selling Puts 9
Option Premiums 11
Intrinsic Value and Time Value 13
Pretest 15
CHAPTER 2 OPTION STRATEGIES 19
Using Options as a Hedge 19
Long Stock Long Puts/Married Puts 19
Long Stock Short Calls/Covered Calls 22
Ratio Call Writing 24
Short Stock Long Calls 24
Short Stock Short Puts 27
Multiple Option Positions and Strategies 29
Long Straddles 29
Short Straddles 32
Selling a Straddle Against Long Stock 34
Spreads 35
Analyzing Spreads/Price Spreads 36
Bull Call Spreads/Debit Call Spreads 37
Spread Premiums Bull Call Spread 38
Bear Call Spreads/Credit Call Spreads 39
Spread Premiums Bear Call Spread 41
Bear Put Spreads/Debit Put Spreads 41
Spread Premiums Bear Put Spread 43
Bull Put Spreads/Credit Put Spreads 43
Spread Premiums Bull Put Spread 45
Condor Spreads 47
Combinations 49
Collars 49
Synthetic Risk and Reward 50
Using a T Chart to Evaluate Option Positions 51
Pretest 57
CHAPTER 3 INDEX, INTEREST RATE, AND CURRENCY OPTIONS 61
Index Option Settlement 61
Exercising an Index Option 62
Index Option Positions 63
Capped Index Options 63
Interest Rate Options 64
Price-Based Options 64
Premiums Price-Based Options Treasury Notes and Bonds 64
Premiums Price-Based Options Treasury Bills 65
Rate-Based Options 65
Currency Markets 66
Spot Rates 66
Foreign Currency Options 67
Foreign Currency Option Basics 67
Buying Foreign Currency Calls and Puts 68
Market Volatility Options/VIX 69
Flex Options 70
Weekly Options 71
Binary Options 71
Pretest 73
CHAPTER 4 THE OPTIONS MARKETPLACE 77
The Option Clearing Corporation 77
The Options Markets 78
The Chicago Board Option Exchange 79
Opening and Closing Option Prices 81
Fast Markets and Trading Halts 81
Order Execution 82
Types of Orders 82
Priority of Option Orders 85
Trade Reporting 85
Option Order Tickets 86
Cabinet Trade/Accommodation Trade 87
Expiration and Exercise 87
American vs. European Exercise 88
Position and Exercise Limits 88
Stock Splits and Stock Dividends 89
Reverse Stock Split 90
Pretest 93
CHAPTER 5 OPTION TAXATION AND MARGIN REQUIREMENTS 97
Taxation of Options 97
Closing an Option Position 98
Exercising a Call 98
Exercising a Put 99
Protective Puts 99
Covered Calls 99
Establishing a Long Position in a Margin Account 100
An Increase in the Long Market Value 101
Special Memorandum Account/SMA Long Margin Account 102
A Decrease in the Long Market Value 104
Minimum Equity Requirement Long Margin Accounts 105
Establishing a Short Position in a Margin Account 106
A Decrease in the Short Market Value 107
Special Memorandum Account (SMA) Short Margin Account 107
An Increase in the Short Market Value 108
Minimum Equity Requirement Short Margin Accounts 109
Combined Margin Accounts 110
Option Contract Margin Requirements 111
Margin Requirements when Exercising a Call 111
Margin Requirements when Exercising a Put 112
Margin Requirements when Writing a Call 112
Margin Requirements Uncovered Call 113
Margin Requirements when Writing a Put 115
Margin Requirements Uncovered Puts 115
Margin Requirements when Establishing a Call Spread 117
Margin Requirements when Establishing a Put Spread 120
Short Straddle Margin Requirements 123
Short Combination Margin Requirements 123
Short Index Option Margin Requirements 124
Short Currency Option Margin Requirements 127
Pretest 131
CHAPTER 6 OPTION COMPLIANCE AND ACCOUNT SUPERVISION 135
Duties of the ROP/ROSFP 135
Additional Duties of the ROP/ROSFP 136
Option Account Compliance 137
Option Agreement 139
Option Account Supervision 139
Large Option Position Reporting Requirements 141
Operating a Discretionary Account 142
Managing Discretionary Accounts 142
Customer Confirmations and Account Statements 143
Mailing Instructions 144
Account Transfer 144
Customer Complaints 145
Trade Complaints Between Members 146
Broker Dealers on the Premises of Other Financial Institutions 146
Regulation S-P 147
Communications with the Public 148
FINRA Rule 2210 Communications with the Public 149
Pretest 153
CHAPTER 7 SECURITIES INDUSTRY RULES AND REGULATIONS 157
The Securities Act of 1933 157
The Prospectus 158
Tombstone Ads 159
Free Riding and Withholding/FINRA Rule 5130 159
The Final Prospectus 160
Prospectus to Be Provided to Aftermarket Purchasers 160
SEC Disclaimer 161
Misrepresentations 161
Private Placements/Regulation D Off erings 161
Rule 144 162
The Securities Exchange Act of 1934 163
The Securities Exchange Commission/SEC 164
Extension of Credit 165
Margin Accounts 165
Guaranteeing a Customer’s Account 167
Day Trading Accounts 167
Commingling Customer’s Pledged Securities 167
Currency Transactions 168
The Patriot Act 168
U.S. Accounts 169
Foreign Accounts 169
Securities Investor Protection Corporation Act of 1970 (SIPC) 169
Customer Coverage 170
The Insider Trading and Securities Fraud Enforcement Act of 1988 170
Firewall 171
Trading Suspensions 171
Issuers Repurchasing Their Own Securities 172
Tender Offers 173
Stockholders Owning 5 Percent of an Issuer’s Equity Securities 174
Short Sales 175
Affirmative Determination 175
Regulation SHO 176
Rule 200 Definitions and Order Marking 176
Rule 203 Security Borrowing and Delivery Requirements 177
Threshold Securities 178
Market Making During Syndication 179
Regulation M, Rule 101 179
Penalty Bids 180
Regulation M, Rule 102 180
Regulation M, Rule 103 181
Passive Market Makers’ Daily Purchase Limit 181
Regulation M, Rule 104 182
Syndicate Short Positions 183
Regulation M, Rule 105 183
Issuing Research Reports 184
Research Reports Required Disclosures 185
Regulation FD Fair Disclosure 186
Customer Accounts 188
Subsidiary (Secondary) Records 188
Securities Position Book (Ledger) Stock Record 188
Order Tickets 188
Confirmations and Notices 188
Monthly Trial Balances and Net Capital Computations 189
Employment Applications 189
Records Required to Be Maintained for Three Years 189
Records Required to Be Maintained for Six Years 189
Records Required to Be Maintained for the Life of the Firm 190
Hiring New Employees 190
Resignation of a Registered Representative 191
Registration Exemptions 192
Persons Ineligible to Register 192
Disciplinary Actions Against a Registered Representative 193
Termination for Cause 193
Outside Employment 194
Private Securities Transactions 194
Gift Rule 194
Sharing in a Customer’s Account 195
Borrowing and Lending Money 196
Customer Complaints 196
Mediation 196
Code of Arbitration 197
The Arbitration Process 197
Simplified Arbitration 198
Larger Disputes 198
Awards Under Arbitration 198
Investor Information 199
Violations and Complaints 199
Resolution of Allegations 199
Minor Rule Violation 200
Firm Element Continuing Education 200
Regulatory Element 201
Pretest 203
ANSWER KEYS 207
GLOSSARY OF EXAM TERMS 213
INDEX 279
