FINRA Options and Derivatives Flashcards

What is a 'covered call' strategy?

Answer: Selling a call option while owning the underlying stock

A covered call involves selling (writing) a call option on a stock the investor already owns, generating premium income in exchange for capping upside potential.

What is a 'protective put' strategy?

Answer: Buying a put option on stock already owned to limit downside risk

A protective put involves buying a put on stock you own, functioning like insurance that limits losses if the stock price declines below the strike price.

Which of the following best describes an options 'straddle'?

Answer: Simultaneously buying a call and a put with the same strike price and expiration

A long straddle involves purchasing both a call and a put with identical strike prices and expiration dates, profiting from significant price movement in either direction.

What does 'time decay' (theta) mean in options pricing?

Answer: The erosion of an option's time value as expiration approaches

Theta represents the rate at which an option loses time value as it approaches expiration, with decay accelerating in the final weeks before expiry.

FINRA Rule 2360 governs transactions in which type of securities?

Answer: Options

FINRA Rule 2360 (Options) establishes conduct standards, account requirements, approval procedures, and supervisory obligations for options transactions.

Before a customer may trade options, a firm must ensure the account has been:

Answer: Approved for options trading based on suitability information

Under FINRA Rule 2360, firms must collect suitability information and formally approve customer accounts for options trading before any transactions occur.