SEC CO/AP cheat sheet

One equity option contract covers 100 shares; premium quoted per share must be multiplied by 100 to get total cost (e.g., $3.20 quote = $320 per contract).

Call buyer has the right to buy 100 shares at the strike; put buyer has the right to sell 100 shares at the strike. Writers have obligations, not rights, and post margin.

American-style options (most equity and ETF options) may be exercised any business day before expiration; European-style (e.g., SPX index options) only at expiration. Cash-settled index options deliver no shares.

Standard expiration is the third Friday of the contract month; equity options expire the Saturday after that Friday, with last trading on Friday. Exercise notice deadline is typically 5:30 p.m. ET on expiration Friday (OCC cutoff).

Moneyness: call is in-the-money when underlying > strike; put is in-the-money when underlying < strike. At-the-money means underlying equals strike; time value is maximized ATM.

Intrinsic value: call = max(0, S − K); put = max(0, K − S). Time value = premium − intrinsic value; it is zero for deep ITM/OTM options near expiration.

Adjustments: stock splits and large stock dividends trigger OCC contract adjustments (more contracts at proportionally lower strike); cash dividends do not adjust listed equity options.

Exercise/assignment: exercise results in a long stock position (call) or short stock position (put) settled T+1; assignment is allocated randomly by the OCC to clearing members, then to customers.

Position limits and exercise limits apply to large option positions (e.g., 250,000 contracts per side for the most liquid classes) and are monitored by the exchanges and FINRA.

Put-call parity (European, no dividends): C − P = S − K/(1+r)^T, or C + K/(1+r)^T = P + S. Violations create arbitrage; for American options parity holds as an inequality.

Black-Scholes inputs: S (spot), K (strike), T (time to expiration), r (risk-free rate), σ (volatility), and dividends. Only volatility is unobservable and must be estimated.

Delta: call 0 to +1, put −1 to 0; approximates probability of finishing ITM and the share-equivalent hedge ratio. ATM delta is about ±0.50.

Gamma: rate of change of delta; highest for ATM near-term options. Long options have positive gamma; short options negative gamma.

Theta: time decay, usually negative for long options; accelerates in the final 30–45 days. ATM options have the largest theta in dollar terms.

Vega: sensitivity to a 1-point change in implied volatility; highest for ATM and longer-dated options. Long options are long vega.

Rho: sensitivity to a 1% change in interest rates; largest for long-dated ITM calls and puts; generally the least important Greek for short-dated equity options.

Implied volatility rises with demand for options and event risk; the volatility skew usually makes OTM puts more expensive than equidistant OTM calls on equity indexes.

Historical (realized) volatility is backward-looking from price returns; comparing it with implied volatility indicates whether options appear rich or cheap.

Covered call: long stock + short call. Max gain = (strike − stock cost) + premium; max loss = stock cost − premium. Assignment risk rises when the call is ITM near ex-dividend or expiration.

Protective put: long stock + long put. Establishes a floor at the strike; max loss = (stock cost − strike) + premium. Equivalent payoff to a long call plus a bond position.

Long straddle: buy call + put at same strike/expiration; profits from large moves either direction; loses both premiums if the stock pins the strike. Long strangle uses OTM strikes and costs less.

Bull call spread: buy lower-strike call, sell higher-strike call; max gain = spread width − net debit; max loss = net debit. Bear put spread mirrors this with puts.

Iron condor: short OTM put spread + short OTM call spread; max gain = net credit; max loss = wider wing width − credit. Profits from low volatility and range-bound price action.

Butterfly: long one lower-strike option, short two middle-strike options, long one higher-strike option; max gain at middle strike = width − net debit; defined risk on both sides.

Calendar spread: sell near-term option, buy longer-dated option at same strike; profits from faster near-term theta decay and rising implied volatility in the back month.

Collar: long stock + long put + short call; limits both downside and upside; often structured to be near zero-cost by matching put cost with call premium.

Rolling: closing an existing option and opening a new one at a different strike or expiration; used to extend duration (roll out) or adjust strike (roll up/down) while managing assignment risk.

Municipal bonds: interest generally exempt from federal income tax; in-state residents may also get state/local exemption. Capital gains on sale remain taxable.

Municipal pricing conventions: general obligation (GO) bonds backed by full taxing power; revenue bonds backed by project cash flows only. GO issues typically require voter approval.

Corporate bond quotes are percent of par (e.g., 98.5 = $985 per $1,000 bond); accrued interest is paid by the buyer to the seller and is computed on a 30/360 basis for corporates and munis.

Bond yield relationships: price and yield move inversely. Current yield = annual coupon / price; YTM discounts all cash flows; YTC uses the call date and call price.

Call features benefit the issuer (refinance when rates fall); put features benefit the holder. Callable bonds trade at higher yields than comparable noncallable bonds.

Seniority: secured debt ranks above unsecured debentures, which rank above subordinated debt; in default, senior secured holders are paid first.

Municipal disclosure: continuing disclosure under SEC Rule 15c2-12 requires annual financial updates and notice of specified events (e.g., rating changes, defaults, taxability).

Corporate credit ratings (AAA to D) reflect default risk; below investment grade (BB+ and lower) is high yield. Rating agencies are NRSROs regulated by the SEC.

Taxable-equivalent yield = municipal yield / (1 − marginal tax rate). Compare this to a taxable bond yield to decide which is better after tax.

Treasury bills: maturities of 4, 8, 13, 17, 26, and 52 weeks; sold at a discount to par, no semiannual coupon; quoted on a discount-yield basis (bank discount method uses 360 days).

Treasury notes (2–10 years) and bonds (20–30 years) pay semiannual interest; quotes are in 32nds of a point (e.g., 99-16 = 99 + 16/32).

Discount yield = (discount / par) × (360 / days to maturity). Bond-equivalent yield converts the discount yield to a 365-day, coupon-equivalent basis and is always higher for the same bill.

Money market instruments (T-bills, commercial paper, CDs, banker's acceptances, repos) have maturities of one year or less and are typically high quality and liquid.

Commercial paper: unsecured short-term corporate promissory notes (usually ≤270 days), issued at a discount; often backed by a bank line of credit.

Negotiable CDs: time deposits of $100,000 or more that trade in the secondary market; brokered CDs may be FDIC-insured up to $250,000 per depositor per bank.

Repurchase agreements: seller sells securities and agrees to buy them back at a set price/date; economically a collateralized short-term loan. Reverse repo is the mirror position.

Treasury auction: competitive bids specify yield; noncompetitive bids accept the auction-clearing yield. Settlement is T+1 for bills and notes/bonds.

STRIPS: zero-coupon Treasury securities created by separating coupons from principal; trade at a discount and are subject to annual phantom income taxation.

Principal-protected notes: return of principal at maturity plus participation in an index; upside is capped and the issuer's credit risk remains. Usually FDIC-uninsured.

Structured notes with buffers: investor absorbs losses beyond a buffer level; downside leverage may exceed 1:1. Read the offering document for cap, buffer, participation rate, and issuer credit rating.

Reverse convertible: pays a high coupon but principal may be repaid in shares of the underlying if it falls below the knock-in/barrier level; exposes the holder to equity downside.

ETNs: unsecured debt of the issuer tracking an index; carry issuer credit risk and may be redeemed or suspended by the issuer. Unlike ETFs, they hold no underlying portfolio.

ETFs: trade intraday like stocks, may trade at a premium/discount to NAV, and can be leveraged or inverse. Leveraged/inverse ETFs reset daily, so returns diverge from the index over longer periods.

Closed-end funds: fixed share count, trade on exchanges at premiums/discounts to NAV, and may use leverage; unlike open-end mutual funds, they do not continuously issue/redeem shares.

Unit investment trusts (UITs): fixed, unmanaged portfolios with a set termination date; no active management; low ongoing expenses.

Variable annuities: insurance contracts with subaccounts; tax-deferred growth; mortality and expense charges apply. Suitability depends on time horizon and liquidity needs.

Non-traded REITs and interval funds: limited liquidity, periodic repurchase at board discretion, and valuation estimates rather than market prices; front-end loads and fees can be substantial.

Regulation T initial margin: 50% of the purchase price for long marginable stock; maintenance margin under FINRA Rule 4210 is 25% of long market value (higher for concentrated positions).

Short sale margin: 50% initial (Reg T) and 30% maintenance under FINRA; short sellers must also maintain the borrowed shares' current market value as collateral.

Minimum equity for a margin account is $2,000 (or 100% of the purchase price if less). Pattern day traders (4+ day trades in 5 business days in a margin account) need $25,000 minimum equity.

Margin call: when equity falls below maintenance, the firm issues a maintenance call; unmet calls can trigger liquidation without notice. Firms may set stricter house requirements.

Options margin: long options require 100% of premium (no loan value); uncovered short calls require premium plus a percentage of underlying (typically 20%) minus OTM amount, with a minimum.

Suitability (FINRA Rule 2111): recommendations must be reasonably based on the customer's investment profile (age, financial situation, objectives, risk tolerance, liquidity needs, experience).

Know Your Customer (FINRA Rule 2090): firms must use reasonable diligence to know and retain essential facts about each customer and person with trading authority.

Options approval levels: firms use tiered approval (e.g., covered calls only, then long options, then spreads, then uncovered writing). Approval requires documented experience and financial capacity.

Reg BI (SEC): broker-dealers must act in the retail customer's best interest, disclose conflicts, and consider reasonably available alternatives; it supplements, not replaces, FINRA suitability rules.

SEC regulates exchanges and broker-dealers; FINRA is the SRO for broker-dealers, enforcing rules such as 2010 (conduct), 2020 (communications), 2090, 2111, and 4210 (margin).

OCC clears and guarantees listed option contracts and administers exercise/assignment; the CBOE and other exchanges list option classes and set position/exercise limits.

Registration: Series 7 (General Securities Representative), Series 63/66 (state law), Series 4 (registered options principal), and Series 24 (principal). Associated persons must be registered before soliciting.

Recordkeeping: SEC Rule 17a-3 (records to be made) and 17a-4 (retention periods); FINRA Rule 4511 requires books and records be preserved for specified periods and be readily accessible.

Communications: FINRA Rule 2210 classifies communications as retail, institutional, or correspondence; retail communications generally require principal approval and filing with FINRA before use.

Customer complaints and arbitration: FINRA Dispute Resolution handles arbitrations; firms must report certain arbitrations, disciplinary actions, and regulatory events on Form U4/U5 and in CRD.

Anti-money laundering: Bank Secrecy Act requires a written AML program, Customer Identification Program (CIP), suspicious activity reports (SARs), and currency transaction reports (CTRs) above $10,000.

Insider trading: SEC Rule 10b-5 prohibits trading on material nonpublic information; firms must maintain information barriers and restricted lists; Section 16 covers insiders of public companies.

SIPC protects customer accounts up to $500,000 (including $250,000 for cash) in the event of broker-dealer failure; it does not cover market losses or unregistered products.

SEC regulates exchanges and broker-dealers; FINRA is the SRO for broker-dealers, enforcing rules such as 2010 (conduct), 2020 (communications), 2090, 2111, and 4210 (margin).

OCC clears and guarantees listed option contracts and administers exercise/assignment; the CBOE and other exchanges list option classes and set position/exercise limits.

Registration: Series 7 (General Securities Representative), Series 63/66 (state law), Series 4 (registered options principal), and Series 24 (principal). Associated persons must be registered before soliciting.

Recordkeeping: SEC Rule 17a-3 (records to be made) and 17a-4 (retention periods); FINRA Rule 4511 requires books and records be preserved for specified periods and be readily accessible.

Communications: FINRA Rule 2210 classifies communications as retail, institutional, or correspondence; retail communications generally require principal approval and filing with FINRA before use.

Customer complaints and arbitration: FINRA Dispute Resolution handles arbitrations; firms must report certain arbitrations, disciplinary actions, and regulatory events on Form U4/U5 and in CRD.

Anti-money laundering: Bank Secrecy Act requires a written AML program, Customer Identification Program (CIP), suspicious activity reports (SARs), and currency transaction reports (CTRs) above $10,000.

Insider trading: SEC Rule 10b-5 prohibits trading on material nonpublic information; firms must maintain information barriers and restricted lists; Section 16 covers insiders of public companies.

SIPC protects customer accounts up to $500,000 (including $250,000 for cash) in the event of broker-dealer failure; it does not cover market losses or unregistered products.