Options--CBOE: "Automatic Exercise, Assignments and Risks"...
Please consult your brokers and CBOE for details.
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From p. 21, "Options Essential Concepts & Trading Strategies" by CBOE...
>>> Expiration Rules
Listed stock options in the United States technically expire on the Saturday following the 3rd Friday of the expiration month. Exceptions are made when legal holidays fall on the Friday or Saturday in the question.
The Saturday expiration exists so that brokerage houses and exchange members will have the morning after the last trading day to resolve any errors.
Automatic Exercise:
A call option will be automatically exercised if the stock's last trade in its primary market on expiration Friday is 0.75 or more ABOVE the strike price unless the customer has given specific instructions not to exercise.
A put option will be automatically exercised if the stock's last trade on expiration Friday is 0.75 or more BELOW the exercise price.
Many firms have a final notification deadline of 4:00 PM EST on the expiration Friday, but this rule varies from firm to firm.<<<
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cboe.com
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Assignments:
>>>The rules of the options markets require their member firms to allocate assignments to customers either on a random selection basis or on a "first-in, first-out" basis and to inform their customers which method is used and how it works.
Regardless of the method used, option writers are subject to the risk each day their options are exercisable that some or all of them may be assigned. (See the discussion in Chapter X under "Risks of Option Writers.")
It is possible that an option writer will NOT receive notification from its brokerage firm that an exercise has been assigned to him until one or more days following the date of the initial assignment to the Clearing Member by OCC.
This creates a special risk for uncovered writers of physical delivery call stock options. This is discussed in paragraph 8 under "Risks of Options Writers" in Chapter X and under "Settlement" in this chapter.<<<
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PRINCIPAL RISKS OF OPTIONS POSITIONS
cboe.com
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>>>OPTION WRITERS
An assigned writer may not receive notice of the assignment until one or more days after the assignment has been made by OCC.
Once an exercise has been assigned to a writer, the writer may no longer close out the assigned position in a closing purchase transaction, whether or not he has received notice of the assignment. In that circumstance, an attempted closing purchase would be treated as an opening purchase transaction.
If an option that is exercisable is in the money, the option writer can anticipate that the option will be exercised, especially as expiration approaches.
The writer of an uncovered call is in an extremely risky position and may incur large losses. Moreover, as discussed in Chapter IX, a writer of uncovered calls must meet applicable margin requirements (which can rise substantially if the market moves adversely to the writer's position). Uncovered call option writing is thus suitable only for the knowledgeable investor who understands the risks, has the financial capacity and willingness to incur potentially substantial losses, and has sufficient liquid assets to meet applicable margin requirements.
As with writing uncovered calls, the risk of writing put options is substantial. The writer of a put option bears a risk of loss if the value of the underlying interest declines below the exercise price, and such loss could be substantial if the decline is significant. The writer of a put bears the risk of a decline in the price of the underlying interest-potentially to zero.
A requisite for writing puts is an understanding of the risks, the financial capacity and willingness to incur potentially substantial losses, and the liquidity to meet margin requirements and to buy the underlying interest, or to pay the cash settlement amount, in the event the option is exercised.
A writer of an American-style put can be assigned an exercise at any time during the life of the option until such time as he enters into a closing transaction with respect to the option. Since exercise will ordinarily occur only if the market price of the underlying interest is below the exercise price of the option, the put writer of a physical delivery option can expect to pay more for the underlying interest upon exercise than its then market value. <<< |
