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Wiley FINRA Series 4 Exam Review 2017: The Registered Options Principal Examination

ISBN: 978-1-119-37980-5
324 pages
March 2017
Wiley FINRA Series 4 Exam Review 2017: The Registered Options Principal Examination (1119379806) cover image

Description

The go-to guide to acing the Series 4 Exam!

The Registered Options Principal Qualification Examination (Series 4) was designed to test a candidate's knowledge of the rules and statutory provisions applicable to the supervisory management of a firm's options personnel and options accounts. After passing the exam, a registered person may supervise a FINRA member firm's options business and is qualified to oversee trades on all forms of options, from equity options to foreign currency options to options on government and mortgage-backed securities. The subject areas covered in the exam are: Options Investment Strategies; Supervision of Sales Activities and Trading Practices; Supervision of Employees, Business Conduct; and Recordkeeping and Reporting Requirements.

Created by the experts at the Securities Institute of America, Inc., Wiley Series 4 Exam Review 2017 arms you with what you need to score high on the test. Designed to let you build and fine-tune your knowledge of all areas covered in the exam and to guarantee that you're prepared mentally and strategically to take the test, it provides:

  • Dozens of examples
  • Assorted practice questions for each subject area covered in the exam
  • Priceless test-taking tips and strategies
  • Helpful hints on how to study for the test, manage stress, and stay focused

Wiley Series 4 Exam Review 2017 is your ticket to passing the Series 4 test on the first try—with flying colors!

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Table of Contents

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

Mini Options 72

Pretest 73

CHAPTER 4 THE OPTIONS MARKETPLACE 77

The Option Clearing Corporation 77

The Options Markets 78

The Chicago Board Option Exchange 79

Direct Market Access 81

Opening and Closing Option Prices 82

Fast Markets and Trading Halts 82

Order Execution 83

Types of Orders 83

Priority of Option Orders 86

Trade Reporting 86

Clearly Erroneous Reports 87

Execution Errors 87

Option Order Tickets 88

Cabinet Trade/Accommodation Trade 89

Expiration and Exercise 89

American vs. European Exercise 89

Position and Exercise Limits 90

Stock Splits and Stock Dividends 91

Reverse Stock Split 92

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 143

Customer Confirmations and Account Statements 143

Mailing Instructions 144

Account Transfer 144

Missing and Lost Securities 146

Customer Complaints 147

Trade Complaints Between Members 147

Broker Dealers on the Premises of Other Financial Institutions 148

Regulation S-P 149

Communications with the Public 150

FINRA Rule 2210 Communications with the Public 151

Pretest 155

CHAPTER 7 SECURITIES INDUSTRY RULES AND REGULATIONS 159

The Securities Act of 1933 159

The Prospectus 160

Tombstone Ads 161

Free Riding and Withholding/FINRA Rule 5130 161

The Final Prospectus 163

Prospectus to Be Provided to Aftermarket Purchasers 164

SEC Disclaimer 164

Misrepresentations 164

Private Placements/Regulation D Offerings 165

Rule 144 166

The Securities Exchange Act of 1934 167

The Securities Exchange Commission/SEC 168

Extension of Credit 168

Margin Accounts 169

Guaranteeing a Customer’s Account 170

Day Trading Accounts 170

Portfolio Margin Accounts 171

Securities Backed Lines of Credit 172

Minimum Margin for Leveraged ETFs 172

Commingling Customers’ Pledged Securities 172

Member Offices 173

Annual Compliance Review 175

Business Continuity Plan 175

Currency Transactions 176

The Patriot Act 176

U.S. Accounts 178

Foreign Accounts 178

Securities Investor Protection Corporation Act of 1970 (SIPC) 178

Customer Coverage 178

The Insider Trading and Securities Fraud Enforcement Act of 1988 179

Firewall 180

Trading Suspensions 180

Issuers Repurchasing their Own Securities 181

Tender Offers 182

Stockholders Owning 5 Percent of an Issuer’s Equity Securities 183

Short Sales 184

Affirmative Determination 184

Regulation SHO 185

Rule 200 Definitions and Order Marking 185

Rule 203 Security Borrowing and Delivery Requirements 186

Threshold Securities 187

Market Making During Syndication 188

Regulation M, Rule 101 188

Penalty Bids 189

Regulation M, Rule 102 189

Regulation M, Rule 103 190

Passive Market Maker’s Daily Purchase Limit 190

Regulation M, Rule 104 191

Syndicate Short Positions 192

Regulation M, Rule 105 192

Issuing Research Reports 192

Research Reports Required Disclosures 194

Regulation FD Fair Disclosure 195

Customer Accounts 196

Subsidiary (Secondary) Records 197

Securities Position Book (Ledger) Stock Record 197

Order Tickets 197

Confirmations and Notices 197

Monthly Trial Balances and Net Capital Computations 197

Employment Applications 198

Records Required to Be Maintained for Three Years 198

Records Required to Be Maintained for Six Years 198

Records Required to Be Maintained for the Life of the Firm 199

Other Record Retention Requirements 199

Hiring New Employees 199

Resignation of a Registered Representative 200

Registration Exemptions 201

Persons Ineligible to Register 202

Disciplinary Actions Against a Registered Representative 203

Termination for Cause 204

CBOE Trading Permit Holders and TPH Organizations 204

Outside Employment 205

Private Securities Transactions 205

Gift Rule 205

Sharing in a Customer’s Account 206

Accounts for Employees of Other Broker Dealers 207

Borrowing and Lending Money 207

Customer Complaints 208

Mediation 208

Code of Arbitration 209

The Arbitration Process 209

Simplified Arbitration 210

Larger Disputes 210

Awards Under Arbitration 210

Investor Information 211

Violations and Complaints 211

Resolution of Allegations 211

Minor Rule Violation 212

Firm Element Continuing Education 213

Regulatory Element 213

Circuit Breakers 214

Limit up Limit down (LULD) 214

Pretest 217

ANSWER KEYS 221

GLOSSARY OF EXAM TERMS 227

INDEX 293

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