36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
16 Part I: Bask Properties ol Stock Options
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Example: The holder of an XYZ January 45 call option wishes to exercise his right to
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buy XYZ stock at $45 per share. He instructs his broker to do so. The broker then
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notifies the administrative section of the brokerage firm that handles such matters.
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The firm then notifies the OCC that they wish to exercise one contract of the XYZ
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January 45 call series.
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Now the OCC takes over the handling. OCC records indicate which member
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(brokerage) firms are short or which have written and not yet covered XYZ Jan 45
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calls. The OCC selects, at random, a member firm that is short at least one XYZ Jan
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45 call, and it notifies the short firm that it has been assigned. That firm must then
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deliver 100 shares of XYZ at $45 per share to the firm that exercised the option. The
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assigned firm, in tum, selects one of its customers who is short the XYZ January 45
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call. This selection for the assignment may be either:
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1. at random,
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2. on a first-in/first-out basis, or
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3. on any other basis that is fair, equitable, and approved by the appropriate
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exchange.
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The selection of the customer who is short the XYZ January 45 completes the
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exercise/assignment process. (If one is an option writer, he should obviously deter
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mine exactly how his brokerage firm assigns its option contracts.)
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HONORING THE ASSIGNMENT
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The assigned customer must deliver the stock - he has no other choice. It is too late
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to try buying the option back in the option market. He must, without fail, deliver 100
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shares of XYZ stock at $45 per share. The assigned writer does, however, have a
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choice as to how to fulfill the assignment. If he happens to be already long 100 shares
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of XYZ in his account, he merely delivers that 100 shares as fulfillment of the assign
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ment notice. Alternatively, he can go into the stock market and buy XYZ at the cur
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rent market price - presumably something higher than $45 - and then deliver the
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newly purchased stock as fulfillment. A third alternative is merely to notify his bro
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kerage firm that he wishes to go short XYZ stock and to ask them to deliver the 100
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shares of XYZ at 45 out of his short account. At times, borrowing stock to go short
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may not be possible, so this third alternative is not always available on every stock.
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Margin Requirements. If the assigned writer purchases stock to fulfill a
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contract, reduced margin requirements generally apply to the transaction, so
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that he would not have to fully margin the purchased stock merely for the pur
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pose of delivery. Generally, the customer only has to pay a day-trade margin of |