Series 4 Practice Exam

An account must be approved in order for an order to be placed and accepted.

OCC’s primary function is to make sure that, when an option is exercised, the writer lives up to their obligation to perform according to the terms of the contract.

Of these four choices, only option A includes information on a confirmation.

A different type of option would be a call instead of a put – that would not answer this question. Writing a put option with a different strike price, therefore a different SERIES of option, would create a vertical spread.

Not only would ROP approval at the B/D level be required for retail communications of this type, but SRO approval would be necessary as well.

The concern when being paid in foreign currency is the value of that currency will decline by the time payment is received – long puts on that currency would be the best hedge.

A closing purchase will close out a short position in an option contract.

The trick here is that, although the 15 calendar day period has elapsed and the client has not yet signed and returned the special option agreement form, closing out positions already taken is permitted – opening NEW positions would not be permitted until the agreement is signed and returned to the member firm.

A discretionary authorization already executed for a regular brokerage account does not extend to options accounts – separate authorization is required.

Risk equivalency questions are asking what maximum loss exposure of a position is. In the case of a long put, one can lose the premium. Shorting stock and going long a call to hedge it exposes the investor to a maximum loss of the long call premium, depending on where the strike price of the long call is set compared to the CMV at which the stock was shorted. It is the best of the four choices.

Investors with long call positions will not receive cash dividends. However, if the investor exercised the call prior to the ex-dividend date, they will be an owner of record on the record date and receive the cash dividend.

The SRO rules require quarterly statements be sent to customers, unless there is activity in their account, in which case monthly statements will be sent. There is no indication in this question of any activity in the account; thus, quarterly at a minimum is required.

A short call carries unlimited risk of loss. Short stock combined with a short put carries unlimited risk of loss – it is the best choice.

SRO rules require that answer A is the proper procedure.

Your B/D may have house rules which will call for customer confirms to be kept at both the branch and a principal supervisory office, but SRO rules do not require it.

Writing one call for each 100 shares long in the account is covered call writing. When more calls are written than one per 100 shares in the account, as in this question, writing 15 calls but only owning 1000 shares, five of those shorted calls are naked/uncovered – this is ‘ratio writing.’

Going long a put one can lose the premium. Going long stock and long a put on that stock exposes the client to a maximum loss of the put premium, depending on the CMV of the stock and the strike price of the put – it is the best of the choices.

Though answer B is not untrue, answer C is a more thorough response – when an option is at least one penny per share in the money at expiration, it will be exercised, unless the long contract holder has issued exception instructions to their brokerage firm to NOT exercise the contract unless certain additional parameters are met.

Floor officials at the options exchange have substantial powers; however, they do not have the authority or power to halt trading in the underlying stock on its principal exchange.

A margin agreement has nothing to do with a client granting discretionary written authorization to their B/D.