110:. Because each contract represents an obligation to buy 100 shares of XYZ stock at $ 50.00, the trader will have to buy anywhere from 0 shares to 7500 shares of XYZ stock as a result of the puts being exercised. In fact, only 49 of the contracts are exercised, meaning that the trader must buy 4900 shares of the underlier. If at the close on Friday, October 19, the trader's position in XYZ stock was short 7,500 shares, then on Monday, October 22, the trader would still be short 2600 shares, instead of flat as the trader had hoped. The trader must now buy back these 2600 shares in order to avoid being exposed to risk that XYZ will increase in price.
1113:
43:
or not. So the writer cannot hedge their position precisely and may end up with a loss or gain. There is a chance that the price of the underlier may move adversely, resulting in an unanticipated loss to the writer. In other words, an option position may result in a large, undesired risky position in
96:
to exercise. Thus, the option seller may end up with an unexpected position in the underlier and thus risk losing value if the underlier's price then moves adversely before the option seller can eliminate this position, perhaps not until the next trading day. The costs of exercise differ from trader
161:
at or before 4:01:30 pm ET on the Friday before expiration. This trade will have occurred during normal hours, i.e. before 4:00 pm. It can be any size and come from any participating exchange. The OCC reports this price tentatively at 4:15 pm, but, to allow time for exchanges to correct errors the
146:, and the trader will now want to exercise them. However, to do so, the trader should first sell 1000 shares of IBM at $ 90.26. This is done so that the trader will be flat IBM stock after expiration. Thirty seconds before the close, IBM drops back to $ 89.95. The calls are now
153:
Pinning of a stock to a particular strike can be exploited by options traders. One way is to sell both a put and a call struck at the pinned value. As noted above, stocks can break their pin and move off the strike, so the trader must keep a careful eye on his positions.
61:
may hedge by buying just enough of the underlier to create a delta neutral portfolio. As time passes, the option seller adjusts his hedge position by buying or selling some quantity of the underlier to counteract changes in the price of the underlier.
105:
A trader has sold 75 put contracts on XYZ Corp. stock, struck at $ 50 and expiring on
Saturday, October 20, 2012. On Friday, October 19—the last day these contracts are traded—XYZ stock closes at $ 49.97, which means the options are $ 0.03
126:
the strike (e.g. from below the strike price to above, or vice versa) can have a large impact on the trader's net position in the underlier on the trading day after expiration. For instance, if an option goes from being
56:
portfolios. The objective is to minimize risk due to the movement of the underlier's price, while implementing whatever strategy led to the sale of the options in the first place. For instance, a seller of a
157:
In this market, the last available price of the underlier, which is used to determine whether an option is automatically exercised, is the price of the regular-hours trade reported last to the
118:
On the day that an option expires—for U.S. exchange traded equity options this is the
Saturday following the third Friday of the month—if an option's underlier is close to
142:
and therefore will expire worthless at this price. However, two minutes before the close of trading, IBM's price suddenly moves to $ 90.26. These options are now
138:
For example, a trader is long 10 calls struck at $ 90.00 on IBM stock, and five minutes before the close of trading, IBM's stock price is $ 89.75. These calls are
656:
231:
996:
686:
150:, and the trader must quickly buy back the stock. Option traders with a broad portfolio of options can be very busy on Expiration Friday.
88:
may charge transaction fees to exercise the option to buy or sell the underlier. If these costs are greater than the amount the option is
818:
554:
1056:
224:
1143:
991:
636:
158:
1031:
569:
423:
217:
39:. The risk to the writer (seller) of the option is that they cannot predict with certainty whether the option will be
650:
97:
to trader, and therefore the option seller may not be able to predict whether the options will be exercised or not.
1138:
828:
73:, and the seller has bought or sold enough of the underlier to satisfy his obligation under the option contract, or
932:
743:
1051:
1046:
701:
646:
80:, and the option will expire worthless, and the seller of the option would have no position in the underlier.
1001:
671:
661:
529:
370:
302:
135:, the trader must rapidly trade enough of the underlier so that the position after expiration will be flat.
950:
798:
783:
748:
691:
1011:
862:
778:
355:
676:
200:
965:
922:
912:
902:
623:
564:
499:
453:
448:
322:
282:
249:
176:
28:
681:
970:
758:
504:
1021:
1006:
975:
960:
927:
793:
584:
549:
312:
277:
240:
40:
1026:
1016:
955:
942:
917:
803:
589:
385:
84:
However, the cost to the option buyer of exercising the option is not zero. For instance, the
907:
897:
887:
846:
841:
823:
753:
519:
514:
486:
438:
317:
257:
171:
77:
24:
1117:
1087:
1082:
1036:
872:
867:
813:
723:
631:
604:
544:
539:
509:
458:
443:
360:
340:
1092:
1077:
877:
788:
738:
715:
696:
524:
466:
433:
428:
408:
332:
1132:
1072:
1041:
882:
808:
768:
763:
599:
471:
418:
413:
395:
292:
272:
181:
53:
44:
the underlier immediately after expiration, regardless of the actions of the writer.
892:
666:
594:
574:
534:
403:
375:
365:
307:
70:
32:
122:, the trader must pay close attention. A small movement of the underlier's price
773:
641:
612:
608:
559:
350:
345:
85:
58:
1097:
733:
728:
494:
380:
20:
287:
1112:
857:
579:
476:
209:
213:
52:
Sellers of option contracts often hedge them to create
201:"OCC Infomemo 30048: Underlying Prices for Expiration"
162:
OCC does not make the price official until 5:30 pm.
1065:
984:
941:
837:
714:
622:
485:
394:
331:
265:
256:
35:. In this situation, the underlier is said to have
92:, the owner of the option may rationally choose
225:
8:
262:
232:
218:
210:
1057:Power reverse dual-currency note (PRDC)
997:Constant proportion portfolio insurance
193:
27:contract at the time of the contract's
7:
992:Collateralized debt obligation (CDO)
19:occurs when the market price of the
14:
1111:
819:Year-on-year inflation-indexed
65:At expiration, usually either
1:
829:Zero-coupon inflation-indexed
159:Options Clearing Corporation
1032:Foreign exchange derivative
424:Callable bull/bear contract
1160:
1106:
933:Stock market index future
247:
31:is close to the option's
1052:Mortgage-backed security
1047:Interest rate derivative
1022:Equity-linked note (ELN)
1007:Credit-linked note (CLN)
1002:Contract for difference
303:Risk-free interest rate
784:Forward Rate Agreement
114:Management of pin risk
1144:Derivatives (finance)
1012:Credit default option
356:Employee stock option
203:Accessed Jan 21, 2012
966:Inflation derivative
951:Commodity derivative
923:Single-stock futures
913:Normal backwardation
903:Interest rate future
744:Conditional variance
250:Derivative (finance)
177:Volatility arbitrage
1118:Business portal
971:Property derivative
976:Weather derivative
961:Freight derivative
943:Exotic derivatives
863:Commodities future
550:Intermarket spread
313:Synthetic position
241:Derivatives market
1139:Options (finance)
1126:
1125:
1027:Equity derivative
1017:Credit derivative
985:Other derivatives
956:Energy derivative
918:Perpetual futures
799:Overnight indexed
749:Constant maturity
710:
709:
657:Finite difference
590:Protective option
1151:
1116:
1115:
888:Forwards pricing
662:Garman–Kohlhagen
263:
234:
227:
220:
211:
204:
198:
172:Option (finance)
148:out of the money
140:out of the money
133:out of the money
78:out of the money
1159:
1158:
1154:
1153:
1152:
1150:
1149:
1148:
1129:
1128:
1127:
1122:
1110:
1102:
1088:Great Recession
1083:Government debt
1061:
1037:Fund derivative
980:
937:
898:Futures pricing
873:Dividend future
868:Currency future
851:
833:
706:
682:Put–call parity
618:
605:Vertical spread
540:Diagonal spread
510:Calendar spread
481:
390:
327:
252:
243:
238:
208:
207:
199:
195:
190:
168:
116:
103:
50:
12:
11:
5:
1157:
1155:
1147:
1146:
1141:
1131:
1130:
1124:
1123:
1121:
1120:
1107:
1104:
1103:
1101:
1100:
1095:
1093:Municipal debt
1090:
1085:
1080:
1078:Corporate debt
1075:
1069:
1067:
1063:
1062:
1060:
1059:
1054:
1049:
1044:
1039:
1034:
1029:
1024:
1019:
1014:
1009:
1004:
999:
994:
988:
986:
982:
981:
979:
978:
973:
968:
963:
958:
953:
947:
945:
939:
938:
936:
935:
930:
925:
920:
915:
910:
905:
900:
895:
890:
885:
880:
878:Forward market
875:
870:
865:
860:
854:
852:
850:
849:
844:
838:
835:
834:
832:
831:
826:
821:
816:
811:
806:
801:
796:
791:
786:
781:
776:
771:
766:
761:
759:Credit default
756:
751:
746:
741:
736:
731:
726:
720:
718:
712:
711:
708:
707:
705:
704:
699:
694:
689:
684:
679:
674:
669:
664:
659:
654:
644:
639:
634:
628:
626:
620:
619:
617:
616:
602:
597:
592:
587:
582:
577:
572:
567:
562:
557:
555:Iron butterfly
552:
547:
542:
537:
532:
527:
525:Covered option
522:
517:
512:
507:
502:
497:
491:
489:
483:
482:
480:
479:
474:
469:
464:
463:Mountain range
461:
456:
451:
446:
441:
436:
431:
426:
421:
416:
411:
406:
400:
398:
392:
391:
389:
388:
383:
378:
373:
368:
363:
358:
353:
348:
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337:
335:
329:
328:
326:
325:
320:
315:
310:
305:
300:
295:
290:
285:
280:
275:
269:
267:
260:
254:
253:
248:
245:
244:
239:
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236:
229:
222:
214:
206:
205:
192:
191:
189:
186:
185:
184:
179:
174:
167:
164:
115:
112:
102:
99:
86:buyer's broker
82:
81:
76:the option is
74:
69:the option is
49:
46:
13:
10:
9:
6:
4:
3:
2:
1156:
1145:
1142:
1140:
1137:
1136:
1134:
1119:
1114:
1109:
1108:
1105:
1099:
1096:
1094:
1091:
1089:
1086:
1084:
1081:
1079:
1076:
1074:
1073:Consumer debt
1071:
1070:
1068:
1066:Market issues
1064:
1058:
1055:
1053:
1050:
1048:
1045:
1043:
1042:Fund of funds
1040:
1038:
1035:
1033:
1030:
1028:
1025:
1023:
1020:
1018:
1015:
1013:
1010:
1008:
1005:
1003:
1000:
998:
995:
993:
990:
989:
987:
983:
977:
974:
972:
969:
967:
964:
962:
959:
957:
954:
952:
949:
948:
946:
944:
940:
934:
931:
929:
926:
924:
921:
919:
916:
914:
911:
909:
906:
904:
901:
899:
896:
894:
891:
889:
886:
884:
883:Forward price
881:
879:
876:
874:
871:
869:
866:
864:
861:
859:
856:
855:
853:
848:
845:
843:
840:
839:
836:
830:
827:
825:
822:
820:
817:
815:
812:
810:
807:
805:
802:
800:
797:
795:
794:Interest rate
792:
790:
787:
785:
782:
780:
777:
775:
772:
770:
767:
765:
762:
760:
757:
755:
752:
750:
747:
745:
742:
740:
737:
735:
732:
730:
727:
725:
722:
721:
719:
717:
713:
703:
700:
698:
695:
693:
690:
688:
687:MC Simulation
685:
683:
680:
678:
675:
673:
670:
668:
665:
663:
660:
658:
655:
652:
648:
647:Black–Scholes
645:
643:
640:
638:
635:
633:
630:
629:
627:
625:
621:
614:
610:
606:
603:
601:
600:Risk reversal
598:
596:
593:
591:
588:
586:
583:
581:
578:
576:
573:
571:
568:
566:
563:
561:
558:
556:
553:
551:
548:
546:
543:
541:
538:
536:
533:
531:
530:Credit spread
528:
526:
523:
521:
518:
516:
513:
511:
508:
506:
503:
501:
498:
496:
493:
492:
490:
488:
484:
478:
475:
473:
470:
468:
465:
462:
460:
457:
455:
454:Interest rate
452:
450:
449:Forward start
447:
445:
442:
440:
437:
435:
432:
430:
427:
425:
422:
420:
417:
415:
412:
410:
407:
405:
402:
401:
399:
397:
393:
387:
384:
382:
379:
377:
376:Option styles
374:
372:
369:
367:
364:
362:
359:
357:
354:
352:
349:
347:
344:
342:
339:
338:
336:
334:
330:
324:
321:
319:
316:
314:
311:
309:
306:
304:
301:
299:
296:
294:
293:Open interest
291:
289:
286:
284:
281:
279:
276:
274:
273:Delta neutral
271:
270:
268:
264:
261:
259:
255:
251:
246:
242:
235:
230:
228:
223:
221:
216:
215:
212:
202:
197:
194:
187:
183:
182:Delta neutral
180:
178:
175:
173:
170:
169:
165:
163:
160:
155:
151:
149:
145:
141:
136:
134:
130:
125:
121:
113:
111:
109:
100:
98:
95:
91:
87:
79:
75:
72:
68:
67:
66:
63:
60:
55:
54:delta neutral
47:
45:
42:
38:
34:
30:
26:
22:
18:
893:Forward rate
804:Total return
692:Real options
595:Ratio spread
575:Naked option
535:Debit spread
366:Fixed income
308:Strike price
297:
196:
156:
152:
147:
144:in the money
143:
139:
137:
132:
129:in the money
128:
123:
119:
117:
108:in-the-money
107:
104:
93:
90:in the money
89:
83:
71:in the money
64:
51:
36:
33:strike price
16:
15:
824:Zero Coupon
754:Correlation
702:Vanna–Volga
560:Iron condor
346:Bond option
1133:Categories
1098:Tax policy
814:Volatility
724:Amortising
565:Jelly roll
500:Box spread
495:Backspread
487:Strategies
323:Volatility
318:the Greeks
283:Expiration
188:References
48:Background
29:expiration
789:Inflation
739:Commodity
697:Trinomial
632:Bachelier
624:Valuation
505:Butterfly
439:Commodore
288:Moneyness
41:exercised
21:underlier
928:Slippage
858:Contango
842:Forwards
809:Variance
769:Dividend
764:Currency
677:Margrabe
672:Lattices
651:equation
637:Binomial
585:Strangle
580:Straddle
477:Swaption
459:Lookback
444:Compound
386:Warrants
361:European
341:American
333:Vanillas
298:Pin risk
278:Exercise
166:See also
17:Pin risk
847:Futures
467:Rainbow
434:Cliquet
429:Chooser
409:Barrier
396:Exotics
258:Options
124:through
120:pinning
101:Example
908:Margin
774:Equity
667:Heston
570:Ladder
520:Condor
515:Collar
472:Spread
419:Binary
414:Basket
37:pinned
25:option
23:of an
779:Forex
734:Basis
729:Asset
716:Swaps
642:Black
545:Fence
404:Asian
266:Terms
613:Bull
609:Bear
351:Call
59:call
381:Put
131:to
94:not
1135::
611:,
371:FX
653:)
649:(
615:)
607:(
233:e
226:t
219:v
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