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Whitepaper on
March 2010
Key Terms
Assignment
Notification by The Options
Clearing Corporation (OCC) to a
clearing member that an owner of
an option has exercised his rights.
For equity and index options,
assignments are made on a
random basis.
Call Option
An option contract that gives
the owner the right to buy the
underlying security at a specified
price (its strike price) for a certain,
fixed period of time (until its
expiration). The investor who
sells a call option is obligated to
deliver the stock if the call option
is exercised.
Deep-in-the-money
A call option is deep in the money
if the price of the underlying stock
is well above the strike price of
the option.
January 5, 2010:
2,104,178
Ex-dividend date
The ex-dividend date is the first
date when buying a stock does
not entitle the new buyer to the
declared dividend. To collect the
dividend payment, the stock must
be owned prior to that date.
Source: OCC
Key Terms
Exercise
To invoke the rights granted to
the owner of an option contract.
In the case of a call, the option
owner buys the underlying stock
at the strike price.
Long a call option
The position of the purchaser
(owner) of a call option. Someone
who is long a call option has the
right to buy stock at the strike price
at or before the expiration date.
Long stock position
A position in which an investor
has purchased and owns stock.
Open Interest
The total number of outstanding
option contracts on a given series
or for a given underlying stock.
Short a call option
The position of an option writer
(seller) which represents an
obligation to meet the terms of
the option if it is exercised by its
owner. Someone who is short a
call option is obligated to deliver
stock if the call option is exercised.
In order for an investor to collect the dividend payment, they must own the stock on the day prior to the ex-dividend
date, which is often 1-2 weeks before the dividend is actually paid. For an investor to capture a corporate dividend
using an options strategy, options models dictate that deep-in-the-money call options should be exercised on the last
trading day before the ex-dividend date of the stock. This way, the investor will own the underlying security in time to
collect the dividend payment. There are no automatic exercise rules in place for the day prior to ex-dividend dates.
The Options Clearing Corporation (OCC) only permits market makers to remain both long and short the same position at
the end of a trading day. Other market participants may not do so.
Market Makers A and B trade the $40 calls back and forth
with each other. At the end of the day, they end up with the
following positions in the $40 calls:
Market Marker A
Long positions
500,000
options
contracts
Short Positions
500,000
options
contracts
Market Marker B
Long positions
500,000
options
contracts
Short Positions
500,000
options
contracts
A buy-write position is a covered call position in which stock is purchased and an equivalent number of calls is written at
the same time. Example: buying 500 shares XYZ stock, and writing 5 XYZ $40 calls.
The next chart shows equity options market share for 2009 with
dividend trades excluded from the volume. The difference is notable.
10