Stock Option Trading News

Exercise by Exception Threshold Change

You may have been notified by your options broker of a recent change made to the OCC’s Exercise Threshold value for options expiration day. The SEC just accepted a proposal by the OCC to clear all options that are $0.05 In-the-Money at expiration. The previous Exercise Threshold Value had been $0.25 In-the-Money. So, what does this mean for stock options trading?

To promote liquidity in options trading, the OCC will exercise all options that are $0.05 In-the-Money on the third Saturday of each month. So, if option investors had sold the OCT 20 strike Call on XYZ, you would be assigned if XYZ closed on the third Friday at $20.05 or above. Before this, it was unlikely that you would be assigned unless the stock was trading above $20.25.

This is a good time to offer a little side information. Investors that are completely new to options investing often ask the same question:
“If I sold my 20 strike call option for $2.00, the person on the other side would not exercise it unless the stock was at least at $22.00, right?”

The answer is, “Probably not, but…” It is never a one to one agreement between you the option seller and Joe the option buyer. Yes, he was on one side of the trade and you were on the other, however, when the option contract(s) were sold, they went into a pool with the other stock options contracts. At expiration, any unclaimed options in that pool will be picked up by the OCC, if they are $0.05 In-the-Money. Joe the option buyer may not have assigned your option, but the OCC might.

So, just remember, if your option is $0.05 In-the-money or more, either call or put, you can expect to be assigned at expiration.

Speaking of the OCC, here are some Volume values from last month:
September’s Average Daily Options Volume: 7,984,717
2006 Year-to-Date Average Options Volume: 7,912,053

[tags]stock options, options trading, options investing, option investors, options brokers[/tags]

Leave a Reply

Your email address will not be published. Required fields are marked *