The Options Market Place - American Vs. European Exercise

There are two styles of options that trade in the U.S.: American and European. An American style option may be exercised at any time, by the holder, during the life of the contract. A European style option may only be exercised by the holder at expiration.

If an investor who is long an option decides to exercise the option, the OCC will randomly assign the exercise notice to a broker dealer who is short that option. The broker dealer must then assign the exercise notice to a customer who is short that option. The broker dealer may use any fair method approved by the exchange for randomly assigning exercise notices. If the broker dealer uses the FIFO (first in first out) method of assignment the customer with the oldest open short position will receive the assignment. Any changes to the broker dealer’s assignment practices must be approved by the exchange prior to implementation.

TAKE NOTE!

A broker dealer who receives an exercise notice of 25 contracts or more may assign that notice to any customer who has an open short option position of 25 contracts or more under the “block assignment” exemption.

FINRA Series 4

Taxation Of Options


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