Wiley FINRA Series 4 Exam Review 2017

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