[Compiled from the public account: Introductory knowledge about options]
Option exercise is a very important part of options trading. For novices who are new to the options field, it is crucial to understand how different roles exercise options.
Exercise time: The fourth Wednesday of each month is the exercise day for stock options.
If you hold a position in a call option contract that expires that month, you should brace yourself for this day.
Exercise steps:
1. Exercise: The buyer of the option determines whether to exercise the option. If he chooses to exercise the option, he must submit an exercise declaration before 15:30 pm on the exercise day.
2. Exercise assignment: On the evening of the exercise day, CSDC will conduct a validity test of the securities before the right party exercises the option, and then make the exercise assignment, and the obligated party will be informed of the assignment result.
3. Exercise and settlement: On the trading day next to the exercise date (settlement day), the obligated party must prepare to deliver the securities before 15:00. At the end of the day, China Clearing completed the settlement of securities.
Under normal circumstances, investors can sell the shares received from exercise as early as the fourth Friday of the option expiration month.
Next, we will break down in detail whether and how the four options roles should be exercised.
1. Tips for exercising the rights of the subscriber
(1) Seize the opportunity to exercise rights
When the right party to a call option exercises the option, simply speaking, it means buying the security at the agreed exercise price on the exercise date.
When the price of the security in the market is higher than your exercise price, the contract has real value, that is, it is in a "real value" state.
If you exercise the option at this time, you will be able to buy securities at a lower price. This is obviously a good opportunity to make money, so you can naturally consider exercising the option.
However, there is a small trap here. If the subscription contract is only slightly in-the-money, you may not only make no money but also lose money after exercising the option.
Why? Because starting from your exercise (T day), the securities will not be in your account until the end of T+1 day, and they cannot be sold until T+2 day. If the security price fluctuates during these two days, and you have to pay the exercise fee, the money you originally made may turn into a loss. Therefore, these factors must be taken into consideration before exercising the right.
(2) Be prepared to exercise your rights
First, you must ensure that you have enough money in your option capital account.
Then, within the specified exercise declaration time period, issue the exercise instruction through the special exercise menu on the trading software.
In addition, if you hold long and short orders in the same option contract at the same time, that is, a two-way position, then the actual amount you can exercise is not the number of rights positions you see on the surface, but the number of net positions remaining after hedging. Don’t get this wrong, otherwise it may affect your profits.
(3) Early closing strategy
If you don't have enough funds and don't plan to exercise your options, don't worry. You can look at the premium you can get for closing the position. If this amount is more than the handling fee to close the position, then closing the position in advance is a good choice. Doing this can help you lock in the gains you've already made, or at least reduce some potential losses and avoid losing everything.
2. The way for the put rights party to exercise its rights
(1) Check the right timing
The exercise of the put option right is equivalent to locking in the selling price of the security in advance.
On the exercise date, you have the right to sell the securities at the pre-agreed exercise price. When the exercise price is higher than the price of the security on the market, the contract is "in the money."
This means that you can sell the security at a higher price than the current market price and make a guaranteed profit. In this case, exercising the option is definitely cost-effective.
Of course, if the situation is not good and you feel that it is not appropriate to exercise the option, you can also choose to sell the contract on the market to close the position as long as the premium you can get from closing the position is enough to pay the handling fee. Doing this can reduce the cost you invested before, or securely obtain the profits you have already earned, so that they will not fly away due to market changes.
(2) Preparation for exercise conditions
If you decide to exercise the option, you must first check whether there are enough underlying securities in your ordinary securities account.
Only if this condition is met, you can initiate an exercise instruction through the exercise menu of the trading software.
In addition, on the exercise day, you have half an hour longer to submit exercise instructions than normal trading hours, and you can submit them until 3:30 pm (15:30) that day. Another thing to note is that if you have two-way positions, the actual exercisable amount is also the net position amount after hedging. This is a very important rule in options trading, and everyone must keep it in mind.
(3) Understand the settlement process
Many people may ask, when will the money received from selling securities after the put exercise be received? It's like this. If you initiate exercise on day T, then by the end of day T+1, the corresponding securities in your ordinary securities account will be removed, and at the same time, the money for selling the securities will be received in the option capital account. At this time, the main process for the right party to exercise the put option is complete.
Wait until the T+2 day, and the funds obtained from the exercise can be used freely as usual, or transferred out of the account, and you can freely use the money.
3. Strategies for exercise of rights by the party obligated to subscribe
(1) Selection of exercise date
For holders of call option obligation positions, such as Xiaojin we are talking about here, they must be hoping that the exercise price will be higher than the price of the underlying security.
In this way, the contract is "out of value", the right party usually will not exercise the right, and Xiao Jin can smoothly earn the royalty.
But if the situation is reversed and the contract becomes "real value", and the right party is likely to exercise the right, then Xiaojin must act quickly and be prepared for exercise and settlement. In fact, in addition to waiting for the right party to exercise his rights, Xiaojin has another way, which is to quickly liquidate the real-valued obligation position in his hand before the contract expires.
This can avoid defaulting on the contract because there are not enough securities to be handed over to the other party, otherwise it will be troublesome. Moreover, in the actual trading process, although it is rare for out-of-value contracts to be exercised, it does happen occasionally. Therefore, even if Xiaojin encounters this seemingly unlikely situation, he must prepare in advance just in case.
(2) Responding to exercise assignments
At the end of the exercise day, if the contract held by Xiaojin is exercised by the right party, the brokerage will give Xiaojin an exercise assignment notice. After Xiaojin receives the notice, he must prepare a sufficient number of underlying securities in his ordinary securities account according to the requirements in the notice before the market closes on the next day (that is, the next trading day), that is, before 3 pm.
After the day-end clearing is completed, the securities used for Bank of Communications in Xiaojin's ordinary securities account will be deducted, and at the same time, the funds obtained from exercise will be added to the option capital account, so that the entire exercise and settlement process is completed.
(3) Be wary of breach of contract during exercise of rights
If on the day of exercise and settlement, Xiaojin finds that he does not have enough securities to fulfill the Bank of Communications' obligations, that would be terrible, and this would constitute a breach of contract on exercise of the option. According to regulations, Xiaojin will be subject to a punitive cash settlement. Specifically, a 10% increase in the closing price of the underlying security on that day is used as the cash settlement price for clearing and settlement.
This is not a small amount, and the loss will be huge. Therefore, you must remember that before the contract expires, you must either close the position in time or prepare sufficient funds and securities to ensure that the exercise and settlement can be successfully completed and avoid the serious consequences of breach of contract.
4. Key points for exercise of the put obligation party
(1) Decision on exercise date
If you earned premium by selling options and want to get your money back steadily, there are two prices you have to keep an eye on at all times: one is the exercise price of the contract, and the other is the market price of the underlying security.
If the price of the security is higher than the exercise price, then the contract is "out of value" and the right party will most likely not exercise the option, so you can safely keep the premium in your pocket.
But if the security price is lower than the exercise price, the contract becomes "real value". At this time, the right party is likely to exercise the option, and you have to be careful. You have to calculate in advance. If all real-valued put contracts are assigned for exercise, based on the exercise price multiplied by the contract unit and then multiplied by the contract quantity, how much money do you need to prepare to buy the stock?
With this knowledge in mind, you can better deal with possible situations. Of course, in addition to waiting to exercise the option or preparing money, you have a third option, which is to quickly close the real-valued position before the contract expires. This will prevent you from defaulting on your contract because you don't have enough money to buy bonds and getting yourself into trouble.
(2) Implement the assignment of executive power
During the exercise and settlement process of put options, as the obligated party, you must prepare sufficient funds to buy securities. So how much money do you need to prepare?
This requires you to pay attention to the exercise assignment notice sent to you by the broker at the end of the exercise day. The assigned contract, quantity and required amount will be clearly written on it, making it clear at a glance.
You just need to follow the requirements in the notice and deposit enough money into the option capital account before the market closes on the next day (that is, the exercise and settlement day), that is, before 3 p.m., and then wait for the settlement.
A special reminder here is that after the day-end liquidation, the money you use for exercise and settlement will be deducted from the option capital account, and the securities you purchased will be transferred to your ordinary securities account (that is, the A-share account). Don’t forget to check it then.
(3) Preventing breach of contract during exercise of rights
If at the end of the exercise and settlement day, you find that you do not have enough money in your account to complete the exercise and settlement, then the brokerage will help you advance the funds so that the exercise and settlement can proceed smoothly.
However, then you are in breach of contract. The brokerage firm will temporarily withhold securities equivalent to no less than your default amount, and then sell these securities on the next day (the trading day following the exercise and settlement), and use the proceeds from the sale to repay the advance funds and other interest and fees that should be paid.
In addition, it is important to note that once an option default occurs, your trading authority may be reduced, which may have an impact on your future options transactions. Therefore, even if you just want to make a little money by doing volunteer work, you must always be wary of risks. If the contract becomes real-valued, you must close the position in time before expiration, or prepare enough money to complete the exercise and settlement. Only in this way can you make steady money in the options market and avoid unnecessary losses.
The option exercise fee has been changed from being charged bilaterally to the exercising client to being charged only to the client with the right to exercise the option.
Charging standard: 1.8 yuan/piece (full commission)
Options account opening
Disclaimer
It is only a compilation of knowledge. This official account does not guarantee the accuracy and completeness of this information. Investment is risky, so be cautious when entering the market. This material does not constitute any investment advice. Please carefully choose products and services that match your own risk tolerance, investment goals, etc.
