Market Operations - Options Exercise, Assignment And Settlement

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


Related Articles
  1. Options & Futures

    American Vs. European Options

    These two options have many similar characteristics, but it's the differences that are important.
  2. Investing Basics

    American Vs. European Options—Key Differences

    There are four key differences between American- and European-style options.
  3. Options & Futures

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
  4. Options & Futures

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  5. Options & Futures

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  6. Options & Futures

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  7. Options & Futures

    Types of Options

    There are many different types of options. In addition to general put options and call option, we will discuss 13 different types of options. Some of these option types are better suited to day ...
  8. Options & Futures

    Give Yourself More Options With Weekly and Quarterly Options

    Weekly and quarterly options were introduced to give a greater choice of option expirations to investors, and enable them to trade more efficiently.
  9. Options & Futures

    20 Investments: Options (Stocks)

    What Is It? Options are a privilege sold by one party to another that offers the buyer the right to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time ...
  10. Options & Futures

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
RELATED TERMS
  1. Early Exercise

    The exercise of an option prior to its expiration date. Early ...
  2. Call On A Call

    A type of compound option in which the investor has the right ...
  3. American Option

    An option that can be exercised anytime during its life. American ...
  4. Call Over

    When the buyer of a call option exercises the option. In options ...
  5. Put On A Call

    One of the four types of compound options, this is a "put" option ...
  6. Fiduciary Call

    A cost effective strategy designed to limit the costs associated ...
RELATED FAQS
  1. How do you tell whether an option is American or European style?

    As a quick recap, American-style options are options that can be exercised at the strike price anytime before or on the date ... Read Answer >>
  2. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  3. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  4. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
  5. How do I measure option liquidity?

    An option is a financial instrument that gives the holder the right to purchase shares in a company at a certain set price ... Read Answer >>
  6. Do you have to be an expert investor to trade put options?

    Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center