Please consider the following information about option assignment and expiration notification procedures established by the Options Clearing Corporation (OCC).
During the period of decimalization the procedure for option assignment and option exercise notices has changed. As an options trader you need to know that any options contract you have an open position in at the market close on expiration Friday (expiration date) becomes an object of option assignment (if your position is short) or automatic option exercise (of your position is long).
However, you may be assigned at any time and not just on expiration date on a short option position. If an option holder exercises, the Options Clearing Corporation chooses a clearing firm, which will then use an approved random process method to allocate the notice to an account that has a matching short position (for example, yours). It may happen both on expiration date of a short option or at any moment before it.
Options are automatically exercised only on option expiration date. With regard to some in-the-money options a special administrative procedure used by the Options Clearing Corporation allows automatic exercise of expiring options; this procedure is called „exercise by exception”. The Options Clearing Corporation will automatically exercise any expiring put stock option or call stock option that will be in-the-money by 0.05 USD or more, as well as any index option that will be in-the-money by 0.01 USD or more. In order to prevent an option from being exercised by exception you must close your position before close of trade for the respective contract.
The Options Clearing Corporation has introduced the exercise by exception procedure to protect the interests of investors; however, exercise by exception may also create significant risks. Consider the following example.
Let’s assume that you are a holder of 50 APV GG contracts (call options for „Apple” stocks, expiration date – July 2009, exercise price – USD 135). Let us also assume that this position is a speculative one and you bought the options several months ago when „Apple” stocks were USD 85 per share. Subsequently, the stock price went up reaching USD 135, but the stocks are only sold at USD 129 on the key Thursday, i.e. the call option has lost in its value. On Friday, „Apple” becomes the leader of an upward rally on Nasdaq closing at USD 135.08. The Options Clearing Corporation automatically exercises your 50 contracts, as a result of which you have a long position for buying 5000 „Apple” stocks on Saturday. However, because of some unfavourable news about the company market opens at USD 131 for „Apple” stocks on Monday morning.
Because you had an open options position you lose 20 thousand USD on the acquired stocks, which might grow even worse if the stock price continues to fall.
Please always be aware of and consider all risks associated with buying and selling options.
JSC „Rietumu Banka” accepts no responsibility for this information, which is provided for information purposes only. Any investment decisions that a client may take based on the information provided by JSC „Rietumu Banka” are his own decisions and in no event will JSC „Rietumu Banka” be liable for any claims or damages arising out of any decisions that a client may have taken based on the information provided by JSC „Rietumu Banka”.