shit I dont know

approval needed to allow discretionary trades

• BOM or ROP responsible for rep overseeing acct

• diff FINRA designated ROP must review accts approval by the BOM or ROP

review of discretionary orders

ROP myst review and sign every discretionary order no later than end of each trading day. this doesn’t apply if firm uses a computerized surveillance tool to review

• a BOM who’s not a ROP can do this if a ROP confirms order approval within reasonable period

what is needed to provide customer about a discretionary options trading program

• written explanation of how program works

• associated costs and risks

• summary of programs cumulative performance history

• if no history, explanation of this fact and a summary describing programs underlying assumptions

accounts for officers and employers of exchanges and broker-dealers → who and what is needed

who → an officer or employee or any exchange OR an officer, partner, director, or employee of any FINRA member firm

needed → prior consent obtained from exchange or member firm (the employer) to open options acct and the broker-dealer who opens the account must send duplicate trade confirmations to the employer

what is needed for a broker-dealer representative to open a joint account and share in gains and losses with a customer and when is this voided

• customer must grant prior written approval

• employer broker-dealer must grant written approval

• representative must contribute to acct and their profits / losses must be shared in direct proportion to their contributions

the requirement to share in proportion is waived when the customer in the joint acct is an immediate family member (parents, children, spouses, in-laws, anyone financially supported by rep)

do professional customer orders receive priority? is there any benefits?

no priority, filled after non-professional orders.

quality for CBOE customer transaction fee rebate depending on monthly trading volume. ranges from 3% to 25%

all professional orders must be marked as such

what is needed for an institutional account to trade foreign currencies

• evidence of authority for institution to engage in currency option or debt option transactions via a corporate resolution, partnership agreement, or trust agreement

• written designation of individuals within institution authorized to execute these trades (part of corp resolution)

• basic financial info about institution

• tax ID num of institution

initial margin requirement on long options

• 100% of premium for regular options

• if a LEAP has over 9 months until expiration then 75%

what defines a short call as covered

• enough shares of underlying security

• fully paid warrants of underlying security with an exercise price the same or lower than the calls strike price

• call on same underlying security at the same strike or lower which expires in the same month or after

• escrow receipt or letter of guarantee from a bank for the underlying stock

how does margin work when a customer has a covered call in a margin acct

the value of the stock is capped by the strike price of the short call

margin deposit for uncovered calls and puts

deposit 100% of premium and a percentage of short stocks value which is usually 20%

when is an uncovered put considered covered

• open short position with enough shares to cover the put

• long put with same strike or higher that expires same month or after

• enough cash in account or a bank guarantee for enough cash to cover purchase of underlying if the put is exercised

margin deposit requirement on straddles

long straddles cant be purchased on margin. but customers must deposit 100% of combined premiums if they enter into long straddle (short straddles aren’t tested)

margin deposit requirement on spreads

maximum potential loss for that position

• debit → net debit

• credit → difference between strikes (the gap) minus the credit

margin requirement on index options

must deposit 100% of the premium and 75% for LEAPS with other 9 months until expiration. seller must deposit premium plus percentage of value of underlying, 20% for narrow based and 15% for broad based

how is equity calculated for minimum maintenance margin requirements

• long → equity = long market value - loan amount (debit record)

• short → equity = cash in account - short market value

how much time do you have to meet a maintenance call?

3 business days

minimum maintenance requirements

• long positions

  • stock = 25% market value

  • options = 100% premium (leaps is 75% if over 9 months)

• short positions

  • stock = 30% market value

  • stock and index options = 10% of the market value of underlying security plus the premium

• both acct types

  • interest rate options = 5% of underlying market value plus premium

  • foreign currency options = 0.75% of underling market value plus premium

how can a customer meet an initial margin requirement or a margin call

by depositing enough cash of fully paid marginable securities to cover. can also sell securities from the account

• if fully paid marginal securities are deposited instead of cash, market value must be 2x the call amount

when is a day trading call issued

when equity drops below 25%, must meet promptly. if not met within 5 business days trading can only occur on a cash basis for 90 days or until call is met

what does portfolio margin have no benefit for

long options or spread positions since the margin requirement is already the maximum possible loss

maximum portfolio margin for most equities

usually 15% (its 50% under Reg T), if position is deemed concentrated its doubled to 30%

general idea about portfolio margin to know

portfolio margin requirements are generally lower which results in greater leverage which means more possible gains or losses

what can portfolio margin be used for and what cant it be used for

• allowed → equity securities, ETFs, options, derivative positions used as hedges

• not allowed → bond positions

who is eligible for portfolio margin

• broker-dealers registered with the SEC

• members of national futures exchanges who’s index futures contracts are properly hedged by the contracts underlying instruments, listed index options, unlisted derivatives, options on ETFs or index warrants

• any other person approved to write uncovered options that have fewer than 615 positions in unlisted derivates or equity of at least $5 million with a registered firm

how can a brokerage firm offer portfolio margin

it needs to get approval from FINRA and demonstrate that it has the sophisticated computer systems necessary to compute and monitor these margin requirements in real time

when does the portfolio margin risk disclosure document need to be delivered by

no later than by the time they make the first transaction in the account. an acknowledgment must be signed that they have read, understood, and will follow its provisions as well

time allowed to meet margin calls in a portfolio margin account

3 business days

guaranteed accounts requirements

• backing must be in writing

• firm carrying account must be permitted to use money and securities in the guaranteeing account to cover any account deficits

• guaranteeing account cant be owned by the broker-dealer at which the accounts are held or any other registered entity receiving commissions related to the account

tax treatment of an option being exercised

• long call → cost basis = strike + premium paid

• long put → sales proceeds = strike - premium received

• short call → sales proceeds = strike price + premium received (breakeven point)

• short put → cost basis = strike price - premium received (breakeven point)

note that bull positions impact cost basis while bear positions impact sales proceeds

treatment of LEAPS for taxation

• long LEAPS → if held for over 1 year, treated as long term

• short LEAPS → if shorted and position is bought back within a year, IRS treats any gain or loss as short term

what triggers a wash sale

buying same or substantially identical securities which includes call options or convertable bonds

wash sales for different options

different series of options are NOT considered substantially identical and not subject to the rule. so if you sell ABC Jan 50 call at a loss and buy a ABC Jan 55 call that is NOT a wash sale

institutional investor definition you forget about

any entity (including individuals) with total assets of at least $50 million

form CRS must be delivered to who before or at the earliest of

to retail investors

• making a recommendation for a specific type of account

• executing a securities transaction of implementing an investment strategy involving securities

• placing an order for a retail investor

• opening a brokerage account for a retail investor

administration side of form CRS

• broker-dealers are required to file form CRS with FINRA through the FINRA gateway

• changes to form CRS must be send to existing customers within 60 days

• upon request form CRS must be provided to any customer

• form must be posted prominently on broker-dealers website

what is the difference between FINRA suitability and Reg BI?

• Reg BIs care obligation is very similar to FINRAs suitability requirements

• Reg BI also has

  • disclosure obligation → firm is acting in BD capacity, material fees and costs, type and scope of services provided, material limitations on securities or investment strategies, all material facts relating to conflicts of interest associated w a recommendation

  • conflict of interest obligation

  • compliance obligation → establish maintain and enforce written policies and procedures designed to achieve compliance with reg BI

correspondence

25 or fewer retail investors within 30 day calendar period. this 25 limit includes existing and prospective

• does not require prior principal approval if firm has correspondence compliance program. does need post-use review and approval

post-approval records related to retail communications need to include

• copy of communication

• dates of first and last (if there is a last) use

• name of registered principal who approved and date approved

• supporting source of info related to recommendations made

retail communication

more than 25 retail investors within 30 calendar days

• ROP must approve most retail communications before each issue

• most are subject to CBOE filing requirements

types of retail communications

• advertising → material intended for mass market. like newspapers, magazines, website content, internet bulletin boards, TV, billboards, etc

• sales literature → communication concerning options directed to specific audience such as firms customers. this includes circulars, market letters research reports, social media posts, texts, emails, content on a password protected website

• independently prepared reprint (publisher not affiliated w/ member firm and report not commissioned by the member)

• options worksheets

what is an options worksheet and when does it need approval

document that discusses specific options, strategies, and potential outcomes

• in the initial template or form these are sales literature and must be approved by a principal

• when a rep adds market data to a perviously approved template options worksheet, the completed worksheet is not considered sales literature and doesn’t need approval

institutional communication

communication made available to only institutional investors

• do not require advance principal approval if firm has policies and procedures for post-use review and approval

• not subject to FINRA or CBOE filing requirements

when does a retail communication need to be filed with CBOE and / or FINRA

if not accompanied or preceded by the latest ODD, must be filed with CBOE 10 days in advance and receive its approval before use. FINRA req is the same.

• this means advertisements intended for the pubic must be pre-field with CBOE and FINRA

but most options sales literature distributed to existing customers who already received ODD doesn’t need tote filed with CBOE. however FINRA requires filing within 10 business days of first use

• if there is a significant change, must be resubmitted for approval

no filing requirement for

• communications that have been filed with and approved by another SRO with similar standards

• if only reference to options is listing firms services

• ODDs

• prospectuses

public appearances and / or public forums, what are they and what are the rules

these are interactive, real time communications made with third parties and include

• participation in seminar or forum (including digital chat rooms etc)

• radio or television interviews

• other public appearances or speaking activities

rules

• if a recommendation is made, representative must have reasonable basis for any security and disclose if they have a financial interest

• firms must supervise public appearances

• if there are policies covering these, principal review and approval are post use. but if there is a pre made script, slides, handouts, or other electronic materials it needs prior principal approval. also needs approval if seen or heart by more than 25 investors (bc then its a retail communication)

general content rules for options communications

• cant be misleading or omit any material fact

• no inaccurate statements about professional designation of the persons issuing communciation

• no promising / guaranteeing specific results and no making unwarranted claims

• no forecasts of future events which are unwarranted and and forecasts must clearly be labeled as such

• cant contain cautionary statements or caveats that aren’t legible or are inconsistent with opinions expressed in document

• cant make statements suggesting there will always be a secondary market (“well you could just close the uncovered call”)

• must reflect risk and complexities of options transactions

• any statement referring to potential gains must be balanced with a statement about potential loss

• include warning that options are not suitable for all investors

• include a statement that any supporting documentation will be supplied on request

the last two do NOT apply for institutional clients

any options communication that is not preceded or accompanied by the ODD must

• be limited to general description of discussed options

• must have info on where to get copy of ODD

• no recommendations

• no naming specific securities

• cant have past performance or performance projections

• include any statement required by law

• no attention getting graphics, headlines, or photos if they are misleading

when can options communications include projected performance figures like annualized rates of return

• accompanied or preceded by ODD

• dont state or imply that future performance is guaranteed

• parameters realting to performance figures are established (like exercise price, premium, dividends impact outcome etc)

• costs like interest charges and commissions are disclosed

• projections are plausible and intended as a source considered when making any related recommendation

• relevant assumptions are disclosed (like assume contract exercised or expires)

• risks are discussed)

• annualized rates of return are shown based on a minimum of 60 days and formulas used are disclosed and accompanied by a statement that result might not be duplicated

when can past performance be used in options communications

• preceded or accompanied by ODD

• presented in a balanced manner and includes only statistics from specific category

• represents period of at least the MOST RECENT 12 months

• discloses date of recommendations, price of transaction at the time, price at which contract was closed or represented period ended

• data dummies include number of items recommended and number that declined or advanced in value, and an offer to provide the complete record on request must be made

• relevant costs like commissions and interest charges are disclosed

• underling material assumptions used in process are described for annualized rate of return

• indication of general market conditions during period covered by recommendations is given

• statement that results portrayed do not indicate future performance

• ROP must determine that records or stats fairly present transactions reported and initials the report

what does customer need written explanation of if an options program is used in a discretionary account

• how program works

• costs

• any associated risks

what areas of research reports do firms need policies and procedures on

• preparation and distribution

• public appearances by research analysts

• interaction or research analysts with individuals outside research department

• policies and procedures must prevent firms from using research reports to favor customers interests. conflicts of interest must be disclosed whether they involve the firm or its research analyst

what must a firm do when it distributes third-party research reports

• label report as third party research

• disclose any conflicts of interest between third party and firm

• if an affiliated third party wrote the report, a principal must acknowledge that the report is acceptable

statement sending rules

• must be sent quarterly, unless there was no balance or securities in acct

• must be sent monthly for penny stocks

• firms are allowed to charge for paper statements and confirmations

• phone number given cant be that of representative

what does a statement need to contain

• security and money positions

• special charges to acct

• margin accts must show mark-to-market price and market value of each option position and the total for all positions

• outstanding debit and credit balances and resulting acct equity

• legend stating info regarding commissions and charges was included on trade confirmations, further info will be made available promptly upon request

what needs to be on trade confirmation

• type of option, underlying security, expiration month, strike, number of contracts, premium

• commission

• trade date and settlement date

• opening or closing transaction

• if transaction was affected on an agency or principal basis

holding mail

broker-dealer can hold mail upon request for a customer who will be away from residential address for two months, hold can be extended to 3 months if they are out of the country

a broker-dealer may only address communications to a customer in the care of another person if either:

• customer has instructed in writing to do so within past 12 months

• duplicate copies are sent to customer at a different address as requested in writing

what financial info about the firm should customers get

unaudited semi annual report and audited annual report. must be posted on firms website and hard copy available upon request

when does margin risk disclosure need to be provided

before or when opening account and again annually

how to firms disclose being SIPC members

• official sign in windows of principal office and any branch offices

• written notice when acct is opened and anually

if SIPC does not cover a firm it must be disclosed on trade confirmations

floor official

individual appointed by the exchange to oversee trading and the actions of trade participants. they do NOT trade on the exchange

floor trader

exchange member who traders for their account. they do NOT accept public order

floor broker

exchange member, typically a broker-dealer or employee of a broker-dealer, that executes trades for its clients. they do not trade for their account or maintain inventory of positions of securities trades on the exchange

what must a floor broker do when handling and executing customer orders

• announce requests for quotes

• ensure proper execution of an order

• remain active at trading stations where their orders could soon be executed

• identify a specific market maker who’s order they represent when requested by exchange participants

market maker

an exchange member that trades securities from and for its account. does this by filling orders at quoted bid and ask prices.

• they must register for each specific security or securities in which they make a market

• they only trade with other exchange participants and do not deal directly with the public

what do market makers provide?

liquidity. they stand ready to buy or sell at their quoted prices throughout the trading day which makes the exchange more competitive and efficient

can a market maker act as a floor broker?

not for a security they are registered in. but they can act as a floor broker for another security

how many contracts are market maker quotes good and firm for

10

what is a lead market maker

agrees to minimum participation and quote standards in CBOE listed exchange-traded products. the CBOE sets these standards and compensates LMMs for providing market liquidity for thier assigned products

designated primary market maker

an exchange member CHOE designates as primary market maker for given options classes. their primary role is to maintain a fair and orderly market in their class of options. it does this by offering continuous bids and offers on all options contracts in its appointed classes. it also resolves disputes involving transactions in its class upon request of either party of dispute. they may act as a market maker, floor broker, and order book official. they act as an order book official for their appointed options classes

• a firm registered as DPM cannot act in an agency capacity in any of classes of options in which it makes a market, but can act as a floor broker for other options classes

order book official

exchange employee who works on a salaried basis maintain gin the book of public orders (not those from member firms trading accounts) and executing these trades when the market moves in the desired direction. if a floor broker receives an order from a public customer that cant be executed at a market markers current price the order is given to the OBO

• this means OBOs accept at the open market orders and limit orders

• cant accept contingency orders

• dont handle straddles or spreads

contingency orders

• stop

• stop-limit

• market-if-touched

market if touched order

limit order but when the market hits that price it turns into a market order (so not guaranteed above or below a specific price like a limit)

order priority order

• public orders have priority over a member firm or market makers order entered at same price

• if two come in at same price, it goes by which came in first. same for dealer orders

spread priority rule

during trading day, spread limit orders have priority over single contract limit orders. makes easier for floor brokers to satisfy both sides of position

option series

same type (call or put), same underlying asset, same expiration date, same strike

options class

same type (call or put) and same underlying asset

opening rotation

• happens daily

• opens all series for orderly trading by calling for bids and offers for each series

• establishes single opening price at which all matched orders are executed

• starts with calls, nearest term, lowest strike, etc. put options begin with highest strike though

• after all series go through rotation all options can be traded simultaneously throughout rest of day

• during this only market, limit, and stop orders are accepted

  • opening rotation only occurs after the stock has opened for trading in its primary market

closing rotation

• done at end of last trading day (third friday of month) before contract expires from 4:00 pm to 4:30 pm ET

what kind of contracts are opening and closing rotations?

only single contracts. so no combinations, spreads, and straddles

what can you do during a trading halt?

exercise and cancel orders

how does a trading halt occur and end?

• can be ordered by two floor officials on exchange and can last for up to two consecutive business days

• ends when the two floor officials agree that conditions that let to halt are no longer present

what are reasons for halts

• trading in underlying security has been suspended in primary market

• opening of security has been delayed in primary market due to unusual circumstances

• other unusual conditions are present

• if equity trading is halted across all markets due to an SEC circuit breaker, CBOE will halt trading in all equity markets during this time

what is a FINRA trading halt and when does it occur?

a trading halt for options traded over the counter. happens when exchange on which underlying security trades issues a regulatory halt on that security on when underlying security experiences extraordinary market activity. ends when exchanges removes its halt, other types end with FINRA deems halt reason to no longer exist

what is a fast market?

when two or more floor officials determine trading in any options contract is excessive, exchange can declare market in one or more of contracts classes is “fast”. ends when two or more floor officials determine normal conditions have resumed, if these conditions continue a trading halt may be declared

what are the changes that can occur in a fast market

• assign the contracts to order book officials who aren’t originally assigned to the issue

• authorize the order book officials clerks (and OBO) to execute transactions

• direct one or more trading rotations to be employed

• take any other actions deemed necessary to maintain a fair and orderly market

• floor procedure committee can restrict the entry of stop, stop-limit, and market-if-touched orders to help slow market down

why would there be a limitation on uncovered short positions and who does this

FINRA can do this for each options class if officials detainee that the number of open uncovered short positions exceeds established limits. when this happens FINRA can prohibit any further opening of short transactions in contracts of that class unless they are covered

what is acting in concert

when individuals work together to achieve an investment outcome. spouses are considered to do this even if trading in individual accounts

how to we measure position and exercise limits

on each side of the market. upside is long calls and short puts, downside is long puts and short calls

how are position limits expressed

in terms of 100 share contracts

jumbo options

10 regular options contracts

what accounts are looked at for position limit aggregation rules?

accounts that are under common control

• all owners in joint account

• each general parter in partnership account

• accounts with common directors or management

• individual with authority to execute transactions in an account (even POA)

this includes a registered representative who has discretionary authority on several customer accounts

when and how do you report position limits

• broker-dealers must report to the exchange whether any customer hold an aggregate position of 200 or more contracts on same side of market in a single class of options on the previous business day, this is known as a large options position report LOPR

• must indicate customers name, address, SSN or Tax ID, specific options class and number of contracts. if there are short positions the report should indicate if they are covered or naked

• firm must also report when they suspect a customer has exceeded or is trying ti avoid position limit rules

• if there is an update to that report (like a change in position) it must be filed no later than T+5, the initial report is T + 1

• If position falls below 200 threshold the member firm must report the first time this happens and then discontinues filing the report

when do broker dealers do a aggregate position report to FINRA

for customers with more than 200 contracts on same side of market if

• contracts are not OCC issues

• contracts are OCC issued but traded over the counter

• firm that holds customer acct is not registered on an exchange

what else can the exchange request other than position reports?

exchange can request member firm to submit a report detailing all uncovered short positions including proprietary (held by firm) and customer positions. its due 2 business dats after the request

when can exercise limits not be enforced

during the 10 business days before expiration for equity options or the last business day before index options expire

when is a trade not binding

if the order was not executed but was reported to have been executed in error

when does an exchange receive a submission for review for a price adjustment?

within 15 minutes of execution for customer orders and 30 minutes for non customer orders

when is the last time to trade an option

4:00 PM ET on third Friday of expiration month