O.,ter 15: Put Option Basics 
POSITION LIMITS 
253 
Recall that the position limit rule states that one cannot have a position of more than 
the limit of options on the same side of the market in the same underlying security. 
The limit varies depending on the trading activity and volatility of the underlying stock 
and is set by the exchange on which the options are traded. The actual limits are 
13,500, 22,500, 31,500, 60,000, or 75,000 contracts, depending on these factors. One 
cannot have more than 75,000 option contracts on the bullish side of the market - long 
calls and/or short puts - nor can he have more than 75,000 contracts on the bearish 
side of the market - short calls and/or long puts. He may, however, have 75,000 con­
tracts on each side of the market; he could simultaneously be long 75,000 calls and 
long 75,000 puts. 
For the following examples, assume that one is concerned with an underlying 
stock whose position limit is 75,000 contracts. 
Long 75,000 calls, long 75,000 puts - no violation; 75,000 contracts bullish (long 
calls) and 75,000 contracts bearish (long puts). 
Long 38,000 calls, short 37,000 puts - no violation; total of 75,000 contracts bullish. 
Long 38,000 calls, short 38,000 puts - violation; total of 76,000 contracts bullish. 
Money managers should be aware that these position limits apply to all "related" 
accounts, so that someone managing several accounts must total all the accounts' 
positions when considering the position limit rule. 
CONVERSION 
Many of the relationships between call prices and put prices relate to a process 
known as a conversion. This term dates back to the over-the-counter option days 
when a dealer who owned a put ( or could buy one) was able to satisfy the needs of a 
potential call buyer by "converting" the put to a call. This terminology is somewhat 
confusing, and the actual position that the dealer would take is little more than an 
arbitrage position. In the listed market, arbitrageurs and firm traders can set up the 
same position that the converter did. 
The actual details of the conversion process, which must include the carrying 
cost of owning stock and the inclusion of all dividends to be paid by the stock during 
the time the position is held, are described later. However, it is important for the put 
option trader to understand what the arbitrageur is attempting to do in order for him 
to fully understand the relationship between put and call prices in the listed option 
market.