Options Trading Basics-Option Settlement

Saturday, January 15, 2011

Rights & obligations

Remember that a contract option represents a right or an obligation between the parties. The holder or purchaser of a call option contract has the right to purchase shares of the underlying security at a specific price (known as the strike price) for a specific period of time. The party that has entered or sold contract call assumes responsibility delivers security at the strike. Unlike the holder or purchaser of the put option has the right to sell shares of the underlying security at a specified strike price and for a specific period of time. The party that has entered or sold put option has the responsibility of the purchasing price strike security sold. Subscription options are under an obligation to deliver or acquire shares of the underlying security is a short plug or call contracts. The transaction will take place if the option contracts have intrinsic value or in other words, the "in-the-money" on the expiration date.

Option exercise

These rights and obligations met through a process known as exercise and assignment. These conditions set out for the purchase or delivery of the underlying shares represented by those conventions. Options exercise occurs when the owner of a call using their right to buy the underlying shares at the strike price is represented by the Convention. In the case of a put option, this refers to the use of the put holder of the right to sell the underlying shares at a strike price of the contract. Option exercise is considered a right and not always followed. Long-term option contracts can be sold before maturity.

Choice award

Obligation created by selling or shorting a contract if a holder exercising their right of option is said to be assigned to fulfil their obligation. The written call must deliver the underlying security at the strike. The author put you need to buy the underlying security at the strike. As mentioned earlier, this process will only take place if the contract options have intrinsic value or in other words, it's an "in-the-money" to prevent assignment to an "in-the-money" option the option writer must buy back the short position. Remember, a selection of "out-of-the-money", it will expire worthless author relief from their obligation.

American style

There are two style options exercise and assignment, American and European with an American style option, the right to exercise may be initiated by the time of purchase until the end. Early exercise is a feature, the meaning of the option may be to fulfil their obligation, if there is a separate economic advantage to the holder of the option. Most options in Canada and the USA are American style.

European style

European style may be exercised only on the last trading day before expiration date. Remember that is the end of the Saturday after the third Friday of the month. Consequently, the third Friday of the month end is the last trading day. As with American-style options, European style options may be exercised only if they have been "-the-money", if an option has no intrinsic value will expire worthless. It is important to know which category a contract falls in and how the contract is to be settled on expired if they are to-the-money.

Cash settled options

-The-money options or options with intrinsic value can be solved in two different ways about the expiration date. Cash settled options shall not require physical delivery of the underlying security instead, the difference between the market value of the underlying security and the value of the contract option strike is calculated and added to the amount of associated dollar account.

Cash settled examples

Examples of cash settled options include index options, options interest rates and some currency.

Physically settled options

Physically settled options require physical delivery of the underlying security to the equivalent number of shares represented by the number of contracts. Full payment per share in the sum of the strike will be exchanged between the holder of the option and option and the corresponding number of shares will be delivered or purchased accordingly.

Physically settled examples

A few examples of physically settled equity options and choices is more EFT.

Automatic exercise

In an attempt to insure that all the rights and obligations of holders and writers, options clearing companies have adopted a rule of automatic exercise. In Canada, if an option contract is 1 cent on-the-money at the end of the trading day on expiration Friday, the clearinghouse will assume the owner option wishes to exercise their right.

Effects

As the holder of a call option, the underlying value will be automatically purchased strike and shares will be delivered to account holders. As owner of a put option, the underlying security will be sold automatically with price strike and cash equivalents will be added to the account holders is important to note that if the holder of the put does not already own shares of the underlying security, creates a short position. To avoid automatic exercise, the purchaser or option holder can offset the position by selling the contract before expiry. The holder may also advise their broker to not auto mount.

As an option or seller, there is no override. If the contract is in-the-money, outsourcing is inevitable. The short position should disable all or bought back before the end of the trading day on expiration Friday.


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