Options Exercise, Assignment And Settlement
Again, we return to the world of options briefly to touch on a few procedural elements that affect the futures markets.
Process of Assignment
"Assignment" is the designation by a clearinghouse of an option writer who will be required to buy (in the case of a put) or sell (in the case of a call) the underlying futures contract or security when an option has been exercised, especially if it has been exercised early.
Final Trading and Exercise Dates
Depending on the exchange's rules and the nature of the underlying commodity, the "last day of trading" may be the same as the "expiration date" or may occur a few business days earlier. The exchange generally times these according to a cycle, usually monthly or quarterly.
For example, on the Philadelphia Stock Exchange (PHLX), where currency options are bought and sold, contracts expire in January, February, March, June, September and December. The last day of trading is also the expiration date: the Friday preceding the third Wednesday of the month.
The United Currency Option Market (UCOM), the PHLX subsidiary that governs options trading there, is also a good example to discuss exercise dates. That's because UCOM permits both European- and American-style options. A European-style option can only be exercised on the expiration date, while an American-style option can be exercised on any date from the inception of the position through that final day of trading. Other things being equal, an American-style option will have a higher premium than a European-style option for the same underlying assets. That's because there is a value to the right to exercise the option early.
Review And Quiz
TradingThese two options have many similar characteristics, but it's the differences that are important.
InvestingThere are four key differences between American- and European-style options.
TradingThere are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
TradingLearn more about stock options, including some basic terminology and the source of profits.
TradingA brief overview of how to profit from using put options in your portfolio.
TradingLearn the top three risks and how they can affect you on either side of an options trade.
TradingFind out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
TradingA brief overview of how to provide from using call options in your portfolio.