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Equity Option Expiration. Presented by The Options Industry Council

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Equity Option Expiration

Presented by

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Equity Option Expiration - Disclaimer

Options involve risks and are not suitable for everyone. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of

Standardized Options. Copies may be obtained by contacting your broker or The

Options Industry Council at One North Wacker Drive, Chicago, IL 60606. In order to simplify the computations, commissions, fees, margin interest and taxes have not been included in the examples used in these materials. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results.

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Presentation Outline

Expiration

- available months and expiration day vs. expiration Friday

Long options at expiration

- closing positions

- exercise mechanics - “ex-by-ex”

Short options at expiration

- closing positions

- assignment mechanics - assignment notification - pin risk

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Expiration Months

• Available expiration months for equity options are

standardized

• Any particular option class = 4 months

- present calendar month + next - 2 farther-term cycle months

- if LEAPS® available add January (if not included)

• Equity LEAPS®

- always expire in January

- usually expire up to 30 months after initially listed

• Exceptions

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Expiration Day

Equity options expire on the Saturday after the 3

rd

Friday of their expiration months

X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Sat Fri Thu Wed Tue Mon Sun

June

Expiration

Day

Expiration

Day

Expiration

Day

Expiration

Day

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Expiration Friday

Expiration Friday – 3

rd

Friday of month

X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Sat Fri Thu Wed Tue Mon Sun

June

Expiration

Day

Expiration

Friday

(7)

Saturday vs. Friday

Saturday – expiration day

- option contracts literally expire - 11:59 P.M. (Eastern time)

- day for OCC & members to confirm positions

Expiration Friday

- last day to trade expiring options - last day to exercise long contracts

If 3

rd

Friday is exchange holiday

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Remember…

Options expiring unexercised cease to exist

- no rights for holders or obligations for writers

As the call or put holder, you may either

- sell (to close) position - exercise contracts

- let contracts expire worthless

As call or put writer, you may either

- buy (to close) position

- let contracts expire worthless (if not assigned) - fulfill obligations if or when assigned

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Cost of Exercise or Assignment?

In general: fees for exercise and assignment

- vary among brokerage firms

- may be equal to buy/sell commissions

- know in advance – check with your broker

If no existing stock position

- after exercise/assignment a stock position results - keep position (at cash requirement)

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Long Options at Expiration:

Closing Position

Close position

- sell before close of trading expiration Friday - close = 4:00 P.M (Eastern)

- allow sufficient time for transaction(s)

No longer have the right to buy/sell stock

Realize cash profit or loss

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Long Options at Expiration

Exercising Position

Exercise long calls or puts

- generally in-the-money contracts

Remember: you have right vs. obligation

- may exercise all long contracts

- may exercise only part of the position - may exercise no contracts

Your decision

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Long Options at Expiration:

Exercising Position

Exercise procedure

- make your decision

- give your brokerage firm exercise instructions - brokerage firm will instruct the exchange/OCC

Timeframe for exercise at expiration

- OCC has a cutoff time

- a brokerage firm has a cutoff time (always before OCC’s) - a brokerage firm’s expiration cutoff time may differ from

(13)

Long Options at Expiration:

Exercising Position

Check with your brokerage firm!

- know the procedures for exercise

- know the timeframe for giving instructions

- know when/how you will receive confirmation

- the firm may allow canceling instructions (timeframe)

Important!

- once OCC has received your exercise instructions

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Long Options at Expiration:

Exercise by Exception

Exercise by Exception (“Ex-by-Ex”):

- OCC procedure for equity option exercise at expiration - long equity calls or equity puts

- automatically exercised if in-the-money by $0.05 or

more

- $0.05 is the “threshold”

- index options $0.01 or more in-the-money are

automatically exercised and assigned

A brokerage firm may have a different threshold

from OCC’s

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Long Options at Expiration:

Exercise by Exception

No obligation to automatic exercise

You may instruct brokerage firm to

- not exercise any/all options at/within threshold

- exercise any/all options in-the-money by lower amount - exercise any/all options out-of-the-money

Note: “Ex-by-Ex” procedures are not intended to

dictate which customer positions should or

should not be exercised

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Short Options at Expiration:

Closing Position

Equity option writers are assigned based on

position at end of last trading day

Close position (to avoid assignment)

- buy before close of trading expiration Friday - close = 4:00 P.M. (Eastern)

- allow sufficient time for transaction(s) - buy to close

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Short Options at Expiration: Assignment

If you are assigned, you are obligated

- to buy (put) or sell (call) underlying stock whether an

existing stock position or not

Assignment procedure

- OCC receives exercise instructions

- assigns at random member with short position - “member” may be your brokerage firm

- member assigns customer with short position at

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Short Options at Expiration:

Assignment Notice

If you are assigned, you will be notified

- usually before market opens next business day

(Monday)

Know your brokerage firm’s method

- may be via phone or email

Access to your current account online?

- expiration is Saturday

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Short Options at Expiration:

Assignment Notice

Out-of-town or out-of-touch?

- assignment notice is irrevocable

- notice not received – you are still assigned

Your responsibilities

- know the positions and anticipate assignment - check with the broker about assignment

- be prepared for assignment (cash requirements) - understand risk after possible assignment

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Short Options at Expiration:

Anticipating Assignment

Short option expiring in-the-money?

- expect assignment

Short option expiring at-the-money?

- assignment not expected but possible

- traders may exercise at-the-money to manage post

expiration positions

Option trades below expiration price on Friday?

- intra-day arbitrage might result in assignment

- not necessary for option to “close” in-the-money to be

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Short Options at Expiration: Pin Risk

Short option expiring exactly at-the-money

- expect assignment or not?

- can’t predict 100% - there is always risk

- this is “pin risk” – both call and put “pinned” to strike price

If assignment is unacceptable

- buy (close) position on expiration Friday

- before close of trading – 4:00 P.M. (Eastern) - risk avoided

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Triple Witching Day

“Triple Witching Day”

- index futures, index options and equity options expire - March, June, September and December

So what?

- professionals offset large futures/option/stock positions - expiration Friday – increased volatility possible

- volatility may continue after 4:00 – before closing stock

price “hits the tape”

- at 4:00 P.M. option may seem in- or out-of-the-money - at 4:01 P.M. may be the opposite

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