SIE Understanding Products and Their Risks Question 46: Answer and Explanation

Question: 46

Which of the following is an attractive characteristic of purchasing a stock call option?

• A. Call options are regulated by the Securities and Exchange Commission (SEC), rather than by the Financial Industry Regulatory Authority (FINRA).
• B. The purchaser of a call option may possibly gain more profit from changes in market value of the underlying asset with less original cash outlay than if purchasing the underlying security.
• C. Call options may be traded on the New York Stock Exchange (NYSE), which is the exchange with the highest option trading volume.
• D. Options are relatively unknown in the investment community, as they began selling in 1973.

Correct Answer: B

Explanation:

B: Choice B is correct because the owner or holder of a stock call option may exercise the option by purchasing the underlying stock any time before expiration and need not disburse the purchase price until the exercise date. If the stock price rises a significant amount, the option owner may receive as much profit as if the stock were purchased on the option purchase date, without having cash tied up in the amount of the purchase price for the period from the option purchase until the exercise date. Choice A is incorrect because options are regulated by FINRA. FINRA rule 2360 lists definitions and requirements related to trading in options. Choice C is incorrect because the Chicago Board Options Exchange (CBOE) is the largest option exchange in the United States. Based on the sum of market capitalization, the NYSE is the largest equities-based exchange in the world. Choice D is incorrect because options had previously been trading over-the-counter, and in 1973, the Chicago Board of Options Exchange (CBOE) began handling standardized options transactions, which were cleared and guaranteed by the newly-established Options Clearing Corporation.