37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
0.,,,, 1: Definitions 31
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that contract! Quite a difference, especially if multiple contracts are involved. This
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could come as a shock if you thought you were hedged (perhaps you bought 100
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shares of AAA common when you sold this call), only to find out later that you didn't
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have a correctly hedged position in place after all.
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Even more severe problems can arise if this stock splits again during the life
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of this option. Sometimes the options will be adjusted so that they represent a non
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standard number of shares, such as the 150-share options involved here; and after
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multiple splits, the exchange may even apply a multiplier to the option, rather than
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adjusting its strike price repeatedly. This type of thing wouldn't happen on the first
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stock split, but it might occur on subsequent stock splits, spaced closely together
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over the life of an option. In such a case, the dollar value of the option moves much
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faster than one would expect from looking at a quote of the contract.
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So you must be sure that you are trading the exact contract you intend to, and
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not relying on the fact that the striking price is correct and the option price quote
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seems to be in line. One must verify that the option being bought or sold is exactly
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the one intended. In general, it is a good idea, after a split or similar adjustment, to
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establish opening positions solely with the standard contracts and to leave the split
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adjusted contracts alone.
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5. All options are quoted on a per-share basis, regardless of how many shares of
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stock the option involves. Normally the quote assumes 100 shares of the under
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lying stock. However, in a case like the UVW options just described, a quote of 3
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for the UVW April 39¼ means a dollar price of $306 ($3 x 102).
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6. Changes in the price of the underlying stock can also bring about new striking
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prices. XYZ is a $47 stock with striking prices of 45 and 50. If the price of XYZ
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stock falls to $40, the striking prices of 45 and 50 do not give option traders
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enough opportunities in XYZ. So the exchange might introduce a new striking
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price of 40. In practice, a new series is generally opened when the stock trades
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at the lowest (or highest) existing strike in any series. For example, if XYZ is
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falling, as soon as it traded at or below 45, the striking price of 40 may be intro
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duced. The officials of the option exchange that trades XYZ options make the
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decision as to the exact day when the strike begins trading.
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POSITION LIMIT AND EXERCISE LIMIT
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1. An investor or a group of investors cannot be long or short more than a set limit
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of contracts in one stock on the same side of the market. The actual limit varies
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according to the trading activity in the underlying stock. The most heavily trad
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ed stocks with a large number of shares outstanding have position limits of 75,000 |