Equity Stock Option
How are Orders for Options contracts filled?
Purchased of options contracts are made at the market makers ask quotes sales of options contracts are made at the market maker's bid quote
Where are listed options traded?
CBOE - Chicago Board Options Exchange - the largest options exchange AMEX - American Stock Exchange PHLX - Philadelphia Stock Exchange PSE - Pacific Stock Exchange, now renamed the ARCA Exchange *NYSE DOES NOT TRADE OPTIONS, but it owns the AMEX that does trade options
Trading of options contracts on listed equity securities take place on which exchanges?
Chicago Board Options Exchange (Largest marekt) American Stock Exchange Pacific (ARCA) Stock Exchange Philadelphia Stock Exchange
What are the OCC Contract standardized specifications?
Contract Size Strike Price Premium Increments Expiration Date Expiration Spot / Next Month Expiration Cycle
When do contracts expire?
Contracts expire on the third friday of each month @ 11:59 PM ET.
What are the two sides of the market?
"UPSIDE" (bullish) of the market consists of Long Calls and Short Puts & "DOWNSIDE" (bearish)of the market consists of: Long Puts and Short Calls
What is the longest expiration of a LEAP
28 months
What are the position limit aggregation rules to deem that control exists?
- All owners in a join account - each general partner in a partnership account - accounts with common directors or management - an individual with authority to execute transactions in an account
What is the contract size of an equity option?
100 shares
What are the trading hours for listed options?
9:30 AM - 4:00 PM ET. CBOE: 8:30 AM - 3 PM CT
How are LEAPs Issued?
Cycle 1 companies have LEAPs issued after the September expiration for the January that is 28 months later; Cycle 2 companies have LEAPs issued after the October expiration for the January that is 27 months later; and Cycle 3 companies have LEAPs issued after the November expiration for the January that is 26 months later.
What are the three expiration cycles/
Cycle 1: Jan, April, July, Oct Cycle 2: Feb, May, Aug, Nov Cycle 3: Mar, Jun, Sept, Dec
How are position limit violations determined for common control accounts?
Any accounts that are under "common control" are aggregated to determine if there is a position limit violation. Control is deemed to exist for: all owners in a joint account; each general partner in a partnership account; accounts with common directors or management; and an individual with authority to execute transactions in an account. Also considered are: similar patterns of trading activities for different entities; the sharing of similar business purposes or interests; and the degree of contact and communication between the managers of separate accounts.
Based on the current date, what are the only months that can trade?
Based on the current date, only the next two available expiration months within the cycle trade. Based upon a current date of May 1st, the GM (cycle 3) contracts that are permitted to trade are: May (spot) June (Next Month) Sept (the first upcoming regular cycle month in cycle 3) Dec ( (the next upcoming regular cycle month in cycle three)
How are Strike Prices determined?
Based on the existing market price. For most stocks, the interval is set at 2.5 points. Therefore, if a stock is trading at $21 - a strike price cannot be $21, but they can issue the strike price of 17.50, 20.00, 22.50 ect.
What is the Spread Priority Rule?
It is a rule that gives priority to COMBINATION orders (straddles and spreads) that require 2 positions to be filled at 1 net debit or credit. A "one-on-one" transaction describes an order that required on trade following by another and also falls under the rule.
Define CrossIng
If a Floor Broker has orders from two different customers to buy and sell the same contract, the Floor Broker must first attempt an execution on the trading floor. If the Floor Broker cannot complete the transactions with other market participants, then the Floor Broker is permitted to "cross" the trades himself - and must announce on the floor by public outcry that he is "crossing."
What is the settlement when exercised?
If a call seller is exercised, the stock much be delivered 2 business days after exercise date. If a put seller is exercised, they must pay the strike price to buy the stock 2 business days after exercise date.
What happens if their is a trading halt (stop trading) announcement on a given issue?
If the exchange that trades the stock stops trading; then the exchange that trades the option on that stock also stops trading (since there is no longer any way to price the option premium). The holder of the option can still exercise (since exercises go through the O.C.C. - not the exchange), or let a contract expire, if there is a trading halt.
How are premiums quotes?
In pennies in minimum increments of 5 cents for contracts trading below $3 and 10 cents for the contrasts trading more than $3
What does the OCC due?
Issue the contracts, guarantee the contracts, and act as the clearing house for all listed options traded
In order to cover the sale of a call, a customer must be what?
Long the stock; Long an escrow receipt for the stock; Long a convertible security that is convertible into the stock; Long a call with the same strike price or lower; and the same or later expiration.
Who can trade for their own account on the floor of an options exchange?
Market Makers (DMMs) and Registered Options Traders
What is the actual maximum contract life?
Max life of an equity options contract is 8 months.
How do you find the total premium of a contract?
Multiple by the contrast size of 100
Are option contracts adjusted for cash dividends?
NO!!!!!!
What does the Options Disclosure document explain?
Next Business Day Settlement Maintenance of Records Assignment of Exercise Notice Settlement when Exercised Position Limits
What is the technical maximum contract life?
Options exchange are permitted to issue contracts with a given expiration month that is 9 months in the future.
Define Covered Options?
Options that are not exposed to market risk Does not have to put up margin to take the position
Which individuals CANNOT buy options for his own account?
Order Book Officials and Floor Brokers
Which of the following cover a short ABC put? I Long ABC stock position II Short ABC stock position III Cash equal to the aggregate exercise price A I only B II only C II and III D I, II, III
THe best answer is C
What does the market determine?
The Premium
When does settlement occure on a Cash Trade Options Purchase?
The Same day. The OCC will not assign an exercise notice until the holder has paid for the contract. In this case, the contract is immediately exercised, the exercise notice can be assigned that same business day.
Which of the following are "classes" of options? I ABC Calls II ABC Puts III ABC Jan 50 Calls IV ABC Jan 50 Puts A I and II B I and III C II and III D III and IV
The best answer is A. A class of option consists of all options of one type on an underlying security. For example, all ABC calls are a "class;" all ABC puts are a "class." In contrast, an options "series" would be all ABC Jan 50 Calls - a series is a class of option on the same underlying stock with the same strike and expiration.
A customer purchases an equity option contract at 1:00 PM Eastern Standard Time on Tuesday, October 10th in a regular way trade. If the customer wishes to exercise, the customer may place an exercise notice with the Options Clearing Corporation: A immediately B no earlier than 10:00 AM Eastern Standard Time, the next business day C no earlier than 10:00 AM Eastern Standard Time, on the 3rd business day following trade date D no earlier than the Friday immediately preceding the third Saturday of the expiration month
The best answer is A. An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. However, the Options Clearing Corporation does not handle the exercise until the morning of the next business day (which is also the day that the customer must pay for the option contract). This procedure is followed because the Options Clearing Corporation does not receive the report of the purchase of the option until the close of trading on the day that the contract is purchased. The O.C.C. opens the next day with the customer recorded as being "long" that contract, and can now assign an exercise notice to a writer. Review
On the Chicago Board Options Exchange, the person responsible for handling those orders that can be executed immediately is the: A Order Book Official B Floor Broker C Market Maker D Retail Member
The best answer is B
On the floor of the Chicago Board Options Exchange, duties similar to those performed by the NYSE Specialist (DMM) are handled by the: A floor broker B market maker C floor trader D competitive trader
The best answer is B
The Floor Broker holds an order to buy an option contract from 1 customer at the market; and an order to sell the same contract from another customer at the market. The Floor Broker could not execute the orders in the open market; and therefore, executed the orders by matching them. This practice is known as: A Arbitrage B Crossing C Backing Away D Free Riding
The best answer is B
A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. The first date that the customer can exercise the put and still retain the dividend is: A any date before the ex date B the ex date C any date before the record date D the record date
The best answer is B If a customer owns stock and owns a put on the stock, in order to receive a cash dividend on that stock, the customer cannot exercise until the ex date or after. Exercise settlement is 2 business days after exercise do, so if the put is exercised on the ex date (1 business day prior to record date) or after, the trade will settle after the record date, and the customer will still show as the owner of record to receive the cash dividend.
A put is assigned just after the ex date for a cash dividend. The customer: A will receive the dividend B will not receive the dividend C must pay the dividend D is not required to pay the dividend
The best answer is B. If the put is "assigned," it means that the OCC (Options Clearing Corporation) has selected that put writer to receive the exercise notice (because a holder of that contract has chosen to exercise), obligating the writer of the put to buy the stock in a regular way trade. Because the writer of the put is assigned after the ex date, the writer is buying the stock after the last date to get the dividend. Thus, the writer would not get the dividend.
A customer purchases an equity option contract in a regular way trade at 1:00 PM Eastern Standard Time on Tuesday, October 10th, and files an exercise notice at 3:00 PM on the same day. The option contract will first be assigned by the Options Clearing Corporation: A immediately B no earlier than 10:00 AM Eastern Standard Time, the next business day C no earlier than 10:00 AM Eastern Standard Time, on the 3rd business day following trade date D no earlier than the Friday immediately preceding the third Saturday of the expiration month
The best answer is B. An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. However, the Options Clearing Corporation does not handle the exercise until the morning of the next business day (which is also the day that the customer must pay for the option contract in a regular way settlement). This procedure is followed because the Options Clearing Corporation does not receive the report of the purchase of the option until the close of trading on the day that the contract is purchased. The O.C.C. opens the next day with the customer recorded as being "long" that contract, and can now assign an exercise notice to a writer.
An American Style stock option differs from a European style stock options because it can be: A traded anytime until expiration B exercised anytime until expiration C issued at any time until expiration D redeemed anytime until expiration
The best answer is B. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.
A customer holds 10 ABC Jan 60 Call contracts. ABC Corporation is paying a 20% stock dividend. On the ex date, the contracts will show as: A 10 ABC Jan 60 Calls B 10 ABC Jan 50 Calls C 12 ABC Jan 60 Calls D 12 ABC Jan 50 Calls
The best answer is B. This is a stock dividend of 20%. The contract is adjusted by reducing the strike price and increasing the number of shares covered by the contract. The contract holder owns 10 ABC Jan 60 Calls. The strike price of each contract becomes $60/1.20 = $50 and the number of shares covered by each contract becomes 1.20 x 100 = 120 shares. Note that the aggregate exercise value is unchanged.
The last time to trade expiring equity options is: A 4:00 PM Eastern Standard Time; 3:00 PM Central Time; on the day prior to expiration B 4:00 PM Eastern Standard Time; 3:00 PM Central Time; on the expiration day C 5:30 PM Eastern Standard Time; 4:30 PM Central Time; on the day prior to expiration D 5:30 PM Eastern Standard Time; 4:30 PM Central Time; on the expiration day
The best answer is B. Listed equity options trade until 4:00 PM Eastern Standard Time on the third Friday of the expiration month. The contracts expire at 11:59 PM Eastern Standard Time, on the third Friday of the month. Note that Central Time is included in the question because both the CBOE and OCC are located in Chicago, which is on Central Time.
In order to receive a dividend distribution, the last time for the holder of a call option to exercise is: A at least 2 business days prior to the ex date B just prior to the ex date C just prior to the record date D just after the ex date
The best answer is B. Exercise of an option results in a regular way trade. Stocks settle regular way 2 business days after trade date. Since the ex date is set at 1 business day prior to the record date, to receive the dividend, the stock must be bought 2 business days prior to the record date (or just prior to the ex date). Exercising the call just prior to the ex date is the same as buying the stock just prior to the ex date.
If the writer of a put contract is assigned, the put writer must: A pay the strike price for the security in next business day B pay the strike price for the security in 2 business days C deliver the security the next business day D deliver the security in 2 business day
The best answer is B. If the writer of a put is "assigned," this means that the OCC has assigned an exercise notice to that put writer. The put writer is then obligated to buy the stock from the put holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
A customer sells a call. In order to cover the position, the customer must: I buy a call with the same strike price or lower than the one he sold II buy a call with the same strike price or higher than the one he sold III buy a call with the same expiration or shorter than the one sold IV buy a call with the same expiration or longer than the one sold A I and III B I and IV C II and III D II and IV
The best answer is B. To cover the sale of a call contract, the customer may purchase 100 shares of ABC stock; or may purchase a call at the same or lower strike price; with the same or later expiration.
The Market Maker on the CBOE: I buys and sells for his own account II does not buy or sell for his own account III holds a book of public orders IV does not hold a book of public orders A I and III B I and IV C II and III D II and IV
The best answer is B. The CBOE splits the NYSE Specialist's (now renamed the DMM - Designated Market Maker's) functions into two jobs for 2 separate individuals. The market maker on the CBOE buys and sells for his own account but does not hold a book of public orders. The "book" of orders is handled by an exchange employee known as the order book official. OBOs cannot make markets in options contracts. Note that on the NYSE, the Specialist/DMM is 1 person who performs both of these functions.
All of the following statements are true about stock options contracts EXCEPT they: A are American style B can be traded at any time C can be issued at any time D can be exercised at any time
The best answer is C. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.
Which of the following positions would "cover" the sale of 1 ABC Jan 30 Put? I Long 100 shares of ABC at $30 II Short 100 shares of ABC at $30 III Long 1 ABC Jan 40 Put IV Short 1 ABC Jan 40 Put A I and III B I and IV C II and III D II and IV
The best answer is C. A long stock position is not considered a "cover" for a short put since as the market goes down, the short put is exercised and the customer must buy another 100 shares of stock in addition to the shares already owned - so there is double downside risk. A short put is covered if the individual is short 100 shares of the security. As the market goes down, the short put is exercised and the customer is forced to buy back shares that have previously been sold "short." The credit from the short sale is used to buy the shares, so there is no loss to the put writer. The O.C.C. also accepts as "cover," a long put with the same strike price or higher (thus creating a long put spread), a bank guarantee letter (where the bank assumes responsibility for loss), or an escrow receipt for cash sufficient to pay for the stock should the short put be exercised.
A floor broker on the Chicago Board Options Exchange: I can hold an inventory of securities II cannot hold an inventory of securities III can accept all orders IV can accept only day and GTC orders A I and III B I and IV C II and III D II and IV
The best answer is C. The floor broker is used to execute transactions on CBOE for retail member firms. The floor broker can execute a trade with another floor broker, a Market Maker or an Order Book Official, earning a fee for each transaction. Floor brokers do not hold an inventory - this is the function of a market maker. They can accept all orders, and are obligated to find the best available market.
Exercise limits on stock option contracts cover a time period of: A one business day B one calendar day C one calendar week D one calendar month
The best answer is C. Exercise limits are applied to all exercises occurring within a 5 business day period - the same as 1 calendar week.
The O.C.C. assigns exercise notices on a: A first in; first out basis B last in; first out basis C random order basis D method of reasonable fairness
The best answer is C. If an option contract is exercised by a holder, a writer is selected by the Options Clearing Corporation to perform on the contract on a random order basis.
An investor has 1 ABC Jan 50 Call contract. ABC declares a 25% stock dividend. Which statement is TRUE regarding the option contract after adjustment for the dividend? A The contract becomes 1 ABC Jan 60 Call covering 125 shares B The contract becomes 1 ABC Jan 40 Call covering 100 shares C The contract becomes 1 ABC Jan 40 Call covering 125 shares D The contract stays as 1 ABC Jan 50 Call covering 100 shares
The best answer is C. This is a stock dividend of 25%. The contract is adjusted by reducing the strike price and increasing the number of shares covered by the contract. The contract holder owns 1 ABC Jan 50 Call. The strike price becomes $50/1.25 = $40 and the number of shares covered by the contract becomes 1.25 x 100 = 125 shares. Note that the aggregate exercise value of the contract is unchanged.
Which of the following will cover the sale of a call contract on ABC stock? A Depositing cash equal to the current market value of ABC stock B Short 100 shares of ABC stock C Long 1 ABC Put at a lower strike price D Long 1 ABC Call at a lower strike price
The best answer is D
In mid-September 2021, equity LEAPs that are issued for a Cycle 1 company will expire in January of what year? A 2021 B 2022 C 2023 D 2024
The best answer is D.
John and Joe are successful business associates and have been good friends for many years. John has an options account at BD "A," while Joe has his options account at BD "B." John and Joe have given each other full power of attorney over their respective accounts. John and Joe have been discussing ABCD stock and they are both bullish. John buys 150,000 ABCD call contracts in his account at BD "A." Joe buys 175,000 ABCD call contracts in his account at BD "B." The position limit for ABCD is 250,000 contracts. Which statement is TRUE about their actions? A This is not a violation of position limits because the positions were taken in accounts at different broker-dealers B This is not a violation of position limits because the positions were initiated by 2 different persons C This is not a violation of position limits because John and Joe have a power of attorney over each other's account D This is a violation of position limits
The best answer is D. Any accounts that are under "common control" are aggregated to determine if there is a position limit violation. Control is deemed to exist for: all owners in a joint account; each general partner in a partnership account; accounts with common directors or management; and an individual with authority to execute transactions in an account. The most common situation where this comes up is a registered representative who exercises discretionary authority over a number of customer accounts - these would be aggregated to see if there is a violation of position limits. In this case, because the 2 individuals have trading authority over each other's account, they are deemed to be under common control and are aggregated. With a 250,000 position limit (on each side of the market), the 150,000 long calls and 175,000 long calls in the 2 accounts are aggregated to 325,000 contracts on the up-side of the market and exceed the 250,000 contract limit.
Which of the following options strategies would be considered a covered put? A Short 1 ABC Jan 50 Put; Long 1 ABC Jan 50 Call B Short 1 ABC Jan 50 Put; Long 2 ABC Jan 50 Calls C Short 1 ABC Jan 50 Put; Long 100 ABC stock D Short 1 ABC Jan 50 Put; Short 100 ABC stock
The best answer is D. A covered put writer sells a put contract against the underlying short security position. The short put is covered, because if the market falls, and the put is exercised, the credit received from selling the stock "short" can be used to pay for the stock that must be bought by the exercised put writer.
Which of the following statements are TRUE about the CBOE Order Support System? I Orders are directed to the brokerage firm's communication post on the exchange floor II Orders are routed directly to the trading post, bypassing the firm's communication post III Execution notices are sent to the brokerage firm's communication post on the exchange floor IV Execution notices are sent directly from the trading post to the brokerage firm A I and III B I and IV C II and III D II and IV
The best answer is D. All automated trading systems function in a similar fashion. Orders are routed directly to the trading post, eliminating the need for the order to be wired to the communication post on the exchange floor and then written by hand to be given to a floor broker. The execution report is sent directly to the originating firm; it does not go through the firm's communication post.
Which of the following are standardized for listed option contracts? I Contract size II Expiration date III Strike price interval IV Expiration time A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is D. Exchange traded option contracts have standardized contract sizes (e.g., 100 shares of stock), standardized expiration date and time (11:59 PM Eastern Standard Time on the 3rd Friday of the month), and standardized strike price intervals (generally 5 point intervals). The premium or "price" of the option is determined minute by minute in the trading market.
An opening trade in a call option contract takes place on the American exchange (AMEX) between a buyer at ABCD Securities and a writer at PDQR Securities. The issuer of the contract is: A American Stock Exchange B ABCD Securities C PDQR Securities D Options Clearing Corporation
The best answer is D. The Options Clearing Corporation (O.C.C.) is the legal issuer and guarantor of all exchange traded options. Thus, the purchaser of an option contract is relieved of the worry that a writer will not perform on an exercise - since technically, the O.C.C. is the writer of the contract. (The O.C.C. requires that member firms deposit daily monies to ensure that the firms, if their customers are writers who have been exercised, can perform on the exercise.) Review
The seller of an DEF Jan 50 call is covered by all of the following EXCEPT: A long 100 shares of DEF stock B long an escrow receipt for 100 shares of DEF stock C long 1 DEF Feb 40 Call D long $5,000 of cash in the account
The best answer is D. What will NOT cover the sale of a call - cash! The call writer must deliver stock at a fixed price if exercised and if the stock keeps rising, any amount of cash deposited could be insufficient to buy that stock!
Equity options contracts for a given month expire: I on the 2nd Friday of the month II on the 3rd Friday of the month III at 4:00 PM Eastern Standard Time IV at 11:59 PM Eastern Standard Time A I and III B I and IV C II and III D II and IV
The best answer is D. Equity options contracts for a given month expire on third Friday of the month at 11:59 PM Eastern Standard Time. The trading cut-off is 4:00 PM ET on the same day.
All of the following cover a short call contract according to O.C.C. rules EXCEPT: A long the stock B long an escrow receipt for the stock C long a depository receipt for the stock D long the cash value of the stock
The best answer is D. A short call cannot be covered by the deposit of cash because the theoretical loss is unlimited. The only way to cover a short call is with the ownership of the stock or owning an option that allows for the purchase of the stock at a price not to exceed the strike price of the short call, good for the entire life of the short call. Being long the stock covers a short call; long an escrow receipt shows that the stock is on deposit at a bank; long a depository receipt shows that the stock is on deposit with a clearing corporation.
All of the following are true about Cabinet trades (accommodation liquidations) effected on the CBOE EXCEPT cabinet trades: A can be used by customers to close out worthless long positions B can be used by customers to close out worthless short positions C result in an aggregate $1 premium per contract as a result of the transaction D result in an aggregate $1 commission per contract as a result of the transaction
The best answer is D. Cabinet trades on the CBOE, also called "accommodation liquidations," are a means for customers to close out worthless contracts. If a contract is left to expire worthless, the customer does not have a printed record of this event. With a cabinet trade, the customer can close out worthless long or short positions at a premium of $.01 per share ($1 per contract). This results in a printed closing trade confirmation for the customer's records. For executing the trade, the broker will charge a commission - which will surely be more than $1!
The Order Book Official: I is similar to a dealer II is an exchange employee III is a market maker IV records and executes public orders A I and III B I and IV C II and III D II and IV
The best answer is D. The Order Book Official is an employee of the Chicago Board Options Exchange who runs the book of public orders. The "OBO" does not make a market in the option contracts - this function is performed by the "MM" - Market Maker. The "OBO" performs the book function for option contracts.
What is the Spot?
The current trading month
What is the Exercise Options Cut Off?
The last day to exercise equity options is on the third Friday of the expiration month. The last time to exercise on this day is 5:30PM ET
What is the Options trading cut off?
The last day to trade equity options is on the third Friday of the expiration month The last time to trade on this day is 4:00PM ET.
What is the Exercise Limit?
The limit on the number of contracts that can be exercised within any 5 business days period. These limits can vary depending on trading volume of the underlying stock.
What does the OCC limit?
The number of posiitons that any individual can take. The limit vaies depending on the trading volume of the underlying stock - the higher the trade the higher the limit.
How ire the strike price & number of shares effected in a fractional split and stock dividends?
The number of shares per contract is increased and the strike price is reduced. Example: ABC stock "pays" a 20% (1.2) stock dividend Before: 1 ABC Jan 60 Call (covering 100 shares) After: 1 ABC Jan 50 Call (covering 120 shares)
Define Naked Option?
The option is exposed to market risk - must put up margin to take the posiiton (margin on short)
The December stock option contracts of a company assigned to Cycle 2 have just expired. Which contracts will commence trading on the CBOE? A January B February C May D August
The options cycles are: Cycle 1 Jan Apr Jul Oct Cycle 2 Feb May Aug Nov Cycle 3 Mar Jun Sep Dec Cycle 2 contracts are issued for the months of Feb - May - Aug - Nov. One can always get a contract for this month, next month, and the next 2 months in the Cycle. In December, prior to expiration, the contracts that will trade are December (this month), January (next month), February and May (the next 2 months in the cycle). After December contracts expire, the contracts that will trade are January (this month), February (next month), May and August (the next 2 months in the cycle).
How are strike prices and number of shares effected when their is a stock splits and stock dividends?
The strike price is reduced and the number of contracts is increased. For example: ABC Stock splits 2:1 Before: 1 ABC Jan 60 Call After: 2 ABC Jan 30 call
How is the limit applied?
To each "side" of the market.
How is an exercise notice assigned?
When the OCC receives an exercise notice from a brokerage firm, it selects a short contract to be exercised on a random order basis Once received from OCC, it is permitted to select the particular customer to be exercised on either a "first-in, First-out" or random order basis
What happens when a corporation declares a regular cash dividend?
the O.C.C. does not adjust listed options contracts for this distribution (since it usually is a relatively small amount). Note that if a corporation declares a "special cash dividend," which is typically a 1-time large dollar amount, then the option contract is adjusted for this.
XYZ Corporation, after many profitable years, declares a one-time special cash dividend of $20.00 per share. After the announcement, the stock is trading at $200 per share. Your customer holds 1 XYZ Jan 220 Call. As of the ex date, the customer will have: A 1 XYZ Jan 180 Call B 1 XYZ Jan 200 Call C 1 XYZ Jan 220 Call D 1 XYZ Jan 240 Call
the OCC does adjust listed options for special cash dividends that amount to at least $12.50 per contract. Since this special cash dividend amounts to $20 per share x 100 shares = $2,000 value per contract, it will be adjusted. The new strike price will be 220 - $20 cash dividend = 200. The number of shares covered by the contract does not change.
