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.
TradingThe ability to exercise only on the expiration date is what sets these options apart.
TradingLearn how analyzing these variables are crucial to knowing when to exercise early.
Financial AdvisorWe look at strategies to help manage taxes and the exercise of incentive and non-qualified stock options.
TradingLearn more about stock options, including some basic terminology and the source of profits.
TradingOptions are valued in a variety of different ways. Learn about how options are priced with this tutorial.