Allocation Notice

AAA

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.

INVESTOPEDIA EXPLAINS '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. Covered Call

    An options strategy whereby an investor holds a long position ...
  2. Stock Option

    A privilege, sold by one party to another, that gives the buyer ...
  3. Exchange-Traded Option

    An option traded on a regulated exchange where the terms of each ...
  4. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
RELATED FAQS
  1. How can I find out which stocks also trade as options?

    The trading of options has become increasingly popular among retail investors as they become aware of the many different ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  2. Investing

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  3. Fundamental Analysis

    Private vs Public Equity: What's Best?

    What is the better way for a company to attract investors; by making its stock available for sale to whoever wants some, or by petitioning rich people?
  4. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.
  5. Options & Futures

    The Fancy Way To Diversify Your Portfolio: Precious Metal Options

    A guide with strategies on how to invest or trade in precious metals by using options.
  6. Options & Futures

    When And How To Take Profits On Options

    Here are the different criteria to ensure maximum profit taking while trading options.
  7. Investing

    Additional Paid-In Capital

    Additional paid-in capital is an account in the equity section of a balance sheet. It represents the additional amount paid for the company’s shares over the par value of the shares. Additional ...
  8. Options & Futures

    The Future Is Now: All About Futures ETFs

    A new security class - futures ETFs - is gaining popularity. We tell you how futures ETFs work and offer tips.
  9. Options & Futures

    How To Protect A Short Position With Options

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  10. Options & Futures

    Sensitivity Analysis For Black-Scholes Pricing Model

    Trading options requires complex calculations, based on multiple parameters. Which factors impact option prices the most?

You May Also Like

Hot Definitions
  1. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  3. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  4. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  5. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  6. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
Trading Center