General Securities Representative (Series 7) Practice Exam

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Which type of options must settle within one business day upon exercise?

Equity options
Margin options
Index options
Call options

The correct answer is: Index options

Index options must settle within one business day upon exercise because they are cash-settled contracts. When an index option is exercised, the settlement value is based on the current value of the underlying index, which is not tied to the physical delivery of an asset but rather a monetary payoff. As a result, the cash settlement process can be expedited to ensure that it occurs quickly—typically the next business day following exercise. In contrast, other types of options, such as equity options, generally settle in two business days after exercise (T+2). This extended settlement period allows for the physical or electronic transfer of the underlying stock between the parties. Margin options do not pertain to a specific type of settlement but rather relate to the minimum amount of equity needed to hold a position. Call options, which are a subtype of equity options, also follow the standard settlement timeline associated with equity options, resulting in a longer settlement period. The unique characteristic of index options requiring expedited settlement is crucial for traders and investors, as it allows for more immediate capital reinvestment opportunities without the delays associated with physical stock transactions.