Options Investing 101 – Part 3



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Nov 06 2006
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What does it mean to be exercised or assigned on an option transaction?
When you buy an option you have the right to either purchase or sell stock at a predetermined price. When and if you choose to purchase or sell stock at that predetermined price you are said to be “exercising your right”.

When you sell an option you now have the obligation to sell or purchase stock. You have or may not have to fulfill that obligation. You are considered to be “assigned” if you are being required to fulfill that obligation. Typically this occurs when the option is in-the-money. Hence you have to be careful when your option is in-the-money but you do not have the shares to deliver.
What happens to my option if I do nothing?
If you bought a call or put you would lose the premium you paid for the option plus whatever commissions and fees incurred on that transaction. If you sold a call or a put and your option is in-the-money you will most likely be assigned and you will have to sell or buy stock.
When can I anticipate being assigned?
You can anticipate being assigned any time your option becomes in the money. Individual investors may be automatically assigned or exercised at expiration by The Options Clearing Corporation if the option is .25 of a point or more in the money. Also, most brokerage firms have rules under which options will be automatically exercised; check with your broker to determine which automatic exercise rule may apply. Different broker firm has slightly different rules.
What is the expiration date?
The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised. For stock options, this date is the Saturday immediately following the third Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option buyer’s intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday.
What is the last full day of trading in the Equities, OEX and SPX? How do they settle?
The last full day of trading for Equities and OEX is the 3rd Friday of the month. They settle on the close. The last full day of trading for SPX is the Thursday before the 3rd Friday of the month. SPX settles on the opening of the 500 stocks that make up the index on Friday morning. Friday holidays push all of these dates ahead one day.
What is a European-style and American-style option?
American-style is an option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. All stock options are American-style. European-style is an option contract that can only be exercised on the expiration date.

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