Series 7

Derivatives - Closing Transactions

By definition, a closing transaction reduces or eliminates a long position and a short position.

An option can close in one of two ways:
  1. Exercise, in which the option holder elects to put into effect the rights that the instrument confers.

  2. Expiration, in which the option just runs out of time.
  • Upon exercise, the buyer sends the writer an exercise notice, sometimes called an exercise assignment, which requires the writer to sell the security in the case of a call option, or to buy the security in the case of a put option, at the specified strike price.

  • In the case of expiration, there is no further communication or trading necessary between the holder and the writer; the long and short positions just evaporate.
Reading Options Transactions Shorthand
There is shorthand for expressing options transactions. Let's say you saw this on the Series 7 exam:
1 JKL March 90 call @ 2
You would read that as "a call option on one block of 100 shares of JKL Corp. stock, expiring in March, with a strike price of $90, with a premium of $2 per share".

You would not read that last part as "$2 per block of 100 shares". Still, you can see the appeal of an option: in this example, you take a position on a stock for $2 per share instead of $90 per share. Not only that, but by either buying a put or writing a call, you can bet that the share price will go down; when buying the underlying stock, you can only bet on it going up.

The precise time of expiration is 10:59 p.m. Central time, on the Saturday following the third Friday of the month. An order to exercise must be submitted by 4:30 p.m. Central time on that third Friday.



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