Option Trading Exercise

EXERCISE SETTLEMENT

Although most option buyers and sellers close out their options positions by an offsetting closing transaction, an understanding of exercise can help an option buyer determine whether exercise might be more advantageous than an offsetting sale of the option. There is always a possibility of the option seller being assigned an exercise in  stock market. Once an exercise of an option has been assigned to an option seller, the option seller is bound to full fill his obligation (meaning, pay the cash settlement amount in the case of a cash-settled option) even though he may not yet have been notified of the assignment.

INTERIM EXERCISE SETTLEMENT

Interim exercise settlement takes place only for option contracts on securities. An investor can exercise his in- the-money options at any time during trading hours, through his trading member commodity tips. Interim exercise settlement is effected for such options at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in the option contract with the same series (i.e., having the same underlying, same expiry date and same strike price), on a random basis, at the client level. The CM who has exercised the online trading tips option receives the exercise settlement value per unit of the option from the CM who has been assigned the option contract.

FINAL EXERCISE SETTLEMENT

Final exercise settlement is effected for all open long in- the-money strike price options existing at the close of trading hours, on the expiration day of an option contract. All such long positions are exercised and automatically assigned to short positions in money mantra options contracts with the same series, on a random basis. The investor who has long in-the-money options on the expiry date will receive the exercise settlement value per unit of the option from the investor who has been assigned the option contract.

EXERCISE PROCESS

The period during which an option is exercisable depends on the style of the option. On nse india, index options are European style, i.e., options are only subject to automatic exercise on the expiration day, if they are in-the-money. As compared to this, options on securities are American style. In such cases, the exercise is automatic on the expiration day, and voluntary prior to the expiration day of the option contract, provided they are in-the-money mantra analytics. Automatic exercise means that all in- the-money options would be exercised by NSCCL on the expiration day of the contract. The buyer of such options need not give an exercise notice in such cases. Voluntary exercise means that the buyer of an in-the-money option can direct his TM/CM to give exercise instructions to NSCCL. In order to ensure that an option is exercised on a particular day, the buyer must direct his TM to exercise before the cut-off time for accepting exercise instructions for that day. Usually, the exercise orders will be accepted by the system till the close of trading hours. Different TMs may have different cut-off trading courses times for accepting exercise instructions for that day.

Usually , the exercise orders will be accepted by the system till the close of trading hours. Different TMs may have different cut-off times for accepting exercise instructions from customers, which may vary for different options. An option, which expires unexercised becomes worthless. Some TMs may accept standing instructions to exercise, or have procedures for the exercise of every option, which is in-the-money at. Once an exercise instruction is given by a CM to NSCCL, it cannot ordinarily be revoked. Exercise notices given by a buyer at anytime on a day are processed by NSCCL after the close of trading hours on that day. All exercise notices received by NSCCL from the NEAT F&O system are processed to determine their validity. Some basic validation nse stock market checks are carried out to check the open buy position of the exercising client/TM and if option contract is in-the-money. Once exercised contracts are found valid, they are assigned.

ASSIGNMENT PROCESS

The exercise notices are assigned in standardized market lots to short positions in the option contract with same series i.e., same underlying, expiry date and strike price, at the client level. Assignment to the short positions is done on a random basis. NSCCL determines short positions, which are eligible to be assigned and then allocates the exercised positions to any one or more short positions. Assignments are made at the end of the trading day on which exercise instruction is received by NSCCL and notified to the members on the same day. It is possible that an option seller may not receive notification from its TM than an exercise has been assigned to him until the next day following the date of the assignment to the CM by NSCCL.

EXERCISE SETTLEMENT COMPUTATION

In case of index options contracts, all open long positions at in-the money strike prices are automatically exercised on the expiration day and assigned to short positions in option contracts with the same series on a random basis.

For options on securities, where exercise settlement may be interim or final, interim exercise for an open long in- the-money option position can be effected on any day till the expiry of the contract. Final exercise is automatically effected by NSCCL for all open long in-the-money positions in the expiring month option contract, on the expiry day of the option contract. The exercise settlement price is the closing price of the underlying (index or security) on the exercise day (for interim exercise) or the expiry day of the relevant option contract, (final exercise). The exercise settlement value is the difference between the strike price and the final settlement price of the relevant option contract.

For call options, the exercise settlement value receivable by a buyer is the difference between the final settlement price and the strike priceof each unit of the underlying conveyed by the option contract, while for put options it is difference between the strike price and the final settlement

price for each unit of the underlying conveyed by the option contract. Settlement of exercises of options on securities is currently by payment in cash and notby delivery of securities. It takes place for in-the-money option contracts.

The exercise settlement value for each unit of the exercised contract is computed as follows:

CALL OPTIONS: Closing price of the security on the day of exercise – Strike price.

PUT OPTIONS: Strike Price – Closing price of the security on the day of exercise.

For final exercise, the closing price of the underlying security is taken on the expiration day.

The exercise settlement by NSCCL would ordinarily take place on the 3rd day following the day of exercise. Members may ask for clients who have been assigned to pay the exercise settlement value earlier.

SPECIAL FACILITY FOR SETTLEMENT OF INSTITUTIONAL DEALS

NSCCL provides a special facility to Institutions and Foreign Institutional Investors (FIIs)/Mutual Funds etc to execute trades through any I’M, which may be cleared and settled by their CM. Such entities are called custodial participants (CPs). To avail of this facility, a CP is required to register with NSCCL through his CM. A unique CP code is allotted to the CP by NSCCL. All trades executed by a CP through any TM are required to have the CP code in the relevant field on the trading system at the time of order entry.

Such trades executed on behalf of a CP are confirmed by their own CM (and not the CM of the TM through whom the order is entered), within the time specified by NSE on the trade day though the online confirmation facility. Till such time the trade is confirmed by CM of concerned CP, the same is considered as a trade of the TM and the responsibility of settlement of such trade vests with CM of the TM. Once confirmed by CM of concerned CP, such CM is responsible for clearing and settlement of deals of such custodial clients. Fils have been permitted to trade in all the exchange traded derivative contracts subject to compliance of the position limits prescribed for them and their sub-accounts, and compliance with the prescribed procedure for settlement and reporting. A FII/ a sub-account of the FII, as the case may be, intending to trade in the stock market technical analysis course Futures and Options segment of the Exchange, is required to obtain a unique custodial participant (CP) code allotted from the NSCCL.

 

Flls/sub-accounts of Fils which have been allotted a unique CP code by NSCCL are only permitted to trade on the Futures and Options segment. The FH/sub-account of FIl ensures that all orders placed by them on the Exchange carry the relevant CP code al lotted by N SCCL.

 

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