SEC CO/AP flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Option contract multiplier

Each standard equity option contract represents 100 shares. A premium quoted per share is multiplied by 100 to calculate the total dollar cost or proceeds of one contract.

American versus European exercise

American-style options may be exercised any business day before expiration; European-style options may be exercised only at expiration. Most listed equity options are American; many cash-settled index options are European.

Intrinsic value formula

For a call, intrinsic value equals max(0, stock price minus strike). For a put, it equals max(0, strike minus stock price). Time value is premium minus intrinsic value.

OCC contract adjustment

Stock splits and large stock dividends trigger OCC adjustments to strike price and deliverable quantity. Cash dividends do not adjust listed equity option contracts, though they affect early exercise incentives.

Put-call parity

For European options with no dividends: C − P = S − K/(1+r)^T. A violation between a call, put, stock, and bond creates an arbitrage opportunity that traders act on quickly.

Delta interpretation

Delta measures change in option price per one-point change in the underlying and approximates the probability of finishing in-the-money. Calls range 0 to +1; puts range −1 to 0.

Gamma exposure

Gamma is the rate of change of delta. It is largest for at-the-money options near expiration. Long option positions are long gamma; short option positions are short gamma.

Theta and time decay

Theta measures option value lost per day from the passage of time. It is negative for long options and accelerates in the final 30 to 45 days before expiration, especially at-the-money.

Implied volatility

Implied volatility is the volatility input that makes a model price equal the market price. Rising implied volatility increases option premiums; it is not directly observable and must be backed out.

Covered call payoff

Long stock plus short call. Maximum gain equals (strike minus stock cost) plus premium received; maximum loss equals stock cost minus premium. Upside is capped at the strike.

Protective put

Long stock plus long put. The put establishes a floor at the strike price. Maximum loss equals (stock purchase cost minus strike) plus the premium paid for the put.

Long straddle

Buying a call and a put with the same strike and expiration. The position profits from a large move in either direction and loses both premiums if the stock finishes at the strike.

Bull call spread

Buy a lower-strike call and sell a higher-strike call with the same expiration. Maximum gain equals spread width minus net debit; maximum loss equals the net debit paid.

Iron condor

A short out-of-the-money put spread combined with a short out-of-the-money call spread. Maximum gain is the net credit; maximum loss is the wider wing width minus the credit.

Calendar spread

Selling a near-term option and buying a longer-dated option at the same strike. Profits from faster near-term time decay and from rising implied volatility in the back month.

Collar structure

Long stock plus a protective put and a short call. The put limits downside and the call caps upside; strikes are often chosen so that put cost approximately equals call premium.

Municipal bond tax treatment

Interest on municipal bonds is generally exempt from federal income tax and may be exempt from state tax for in-state residents. Gains from selling a municipal bond remain taxable.

Taxable-equivalent yield

Taxable-equivalent yield equals the municipal yield divided by (1 minus the investor's marginal tax rate). It allows comparison of a tax-exempt bond with a taxable bond.

Corporate bond accrued interest

Buyers pay sellers accrued interest from the last coupon date to settlement, computed on a 30/360 basis for corporate and municipal bonds. Prices are quoted as a percent of par.

Callable bond yield

Callable bonds typically offer higher yields than comparable noncallable bonds because the issuer may redeem them early when rates fall. Yield-to-call uses the call date and call price.

Treasury bill discount yield

Discount yield equals (discount divided by par) times (360 divided by days to maturity). Bills are sold at a discount, carry no coupon, and are quoted on this 360-day basis.

Bond-equivalent yield

Bond-equivalent yield converts a Treasury bill's discount yield to a 365-day coupon-equivalent basis. For the same bill, it is always higher than the discount yield.

Commercial paper

Unsecured short-term promissory notes issued by corporations, usually maturing in 270 days or less and sold at a discount. Issuers often back them with bank lines of credit.

Repurchase agreement

A seller sells securities and agrees to repurchase them at a set price and date. Economically it is a short-term collateralized loan; a reverse repo is the mirror position.

Treasury STRIPS

Zero-coupon Treasury securities created by separating coupons from principal. They trade at a discount to par and generate taxable phantom income annually even though no cash is received.

Reverse convertible note

A structured note paying a high coupon but potentially repaying principal in shares of the underlying if it falls below a barrier. The holder bears significant equity downside risk.

Exchange-traded note

An unsecured debt obligation of the issuer that tracks an index. ETNs carry issuer credit risk and hold no underlying portfolio, unlike exchange-traded funds.

Leveraged ETF daily reset

Leveraged and inverse ETFs reset exposure daily, so returns over longer periods diverge from a simple multiple of the index return. They are generally unsuitable for long-term buy-and-hold use.

Regulation T initial margin

Regulation T sets initial margin at 50% of the purchase price for long marginable stock. FINRA Rule 4210 sets maintenance margin at 25% of long market value.

Pattern day trader rule

A pattern day trader executes four or more day trades in five business days in a margin account. The account must maintain minimum equity of $25,000.

FINRA Rule 2111 suitability

Recommendations must be reasonably based on the customer's investment profile, including age, financial situation, objectives, risk tolerance, liquidity needs, and investment experience.

SEC Rule 17a-4 retention

Rule 17a-4 specifies retention periods and formats for broker-dealer books and records. Records must generally be preserved for at least six years and be readily accessible.