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