Allocation Notice

DEFINITION of 'Allocation Notice'

An official notification from an options clearing firm to the writer of an option that the current option holder has exercised and, therefore, the writer must produce the underlying security. This may require the option's writer to purchase or sell securities on the open market to fulfill the contractual obligation.

Allocation notice can also refer to how a broker or advisor would inform a client who has shown interest in an IPO whether his or her requested allocation of IPO shares is available in full, or if only a fraction of the requested total is available for purchase.

BREAKING DOWN 'Allocation Notice'

Because such a high percentage of options expire worthless, investors tend to overlook the fact that every contract can be exercised by the current holder. While most options traders avoid holding their contracts at expiration, someone will always be holding the in-the-money options, and will call upon the writer of the option to deliver the goods.

For example, if an owner of a large block of stocks has been writing covered calls to generate income, and the stock has appreciated enough to make the option exercise profitable, whoever is holding the contract at expiration will call on the stockholder to deliver the shares through his or her brokerage firm.

RELATED TERMS
  1. Pin Risk

    A risk that the writer of an options or futures contract faces ...
  2. Writer

    The seller of an option who collects the premium payment from ...
  3. Covered Writer

    An options seller who owns the underlying security represented ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Naked Writer

    An options seller who does not own the underlying security for ...
  6. Assignment

    1. The transfer of an individual's rights or property to another ...
Related Articles
  1. Options & Futures

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  2. Professionals

    Derivative Securities

    NASAA Series 65: Section 10 Derivative Securities. In this section types of derivatives and buying and selling options.
  3. Professionals

    Option Positions

    Series 7 - Section8: Option Positions
  4. Options & Futures

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  5. Professionals

    Managing Risk with Options Strategies: Covered Calls and Protective Puts

    CFA Level 1 - Managing Risk with Options Strategies: Covered Calls and Protective Puts. This section concludes with details on covered or naked options. Learn the components and payoffs behind ...
  6. Professionals

    Options: Advantages and Disadvantages

    Options: Advantages and Disadvantages
  7. Professionals

    Options: Calls and Puts

    CFA Level 1 - Options: Calls and Puts. Learn the two main types of option derivatives and how each benefits its holder. Provides an example multiple choice question for an option.
  8. Options & Futures

    Options Basics: What Are Options?

    An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock ...
  9. Professionals

    Calls And Puts

    Calls And Puts
  10. Options & Futures

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
RELATED FAQS
  1. Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >>
  2. What is the difference between "right" and "obligation" on a call option?

    Learn what a call option is, what determines a buyer and seller of an option, and what the difference between a right and ... Read Answer >>
  3. How is a put option exercised?

    A put option is a contract that gives the option holder the right, but not obligation, to sell a set amount of shares (1 ... 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. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
  6. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center