INTRODUCTION

Option exercise limits, along with position limits (See KB1252), have been in place since the inception of standardized trading of U.S. securities options. Their purpose is to prevent manipulative actions in underlying securities (e.g., corners or squeezes) as well as disruptions in option markets where illiquidity in a given option class exists.  These limits serve to prohibit an account, along with its related accounts, from cumulatively exercising within any five consecutive business day period, a number of options contracts in excess of the defined limit for a given equity options class (i.e., option contracts associated with a particular underlying security). This includes both early exercises and expiration exercises.

OVERVIEW

U.S. securities option exercise limits are established by FINRA and the U.S. options exchanges.  The exercise limits are generally the same as position limits and they can vary by option class as they take into consideration factors such as the number of shares outstanding and trading volume of the underlying security. Limits are also subject to adjustment and therefore can vary over time.  The Options Clearing Corporation (OCC), the central clearinghouse for U.S. exchange traded securities options, publishes a daily file with these limits on its public website. The link is as follows: http://www.optionsclearing.com/webapps/position-limits.  FINRA Rule 2360(b)(4) addresses exercise limits and can be found via the following website link: http://finra.complinet.com/en/display/display.html?rbid=2403&record_id=16126&element_id=6306&highlight=2360#r16126).

Note that exercise limits are applied based upon the the side of the market represented by the option position. Accordingly, all exercises of call options over the past five business days are aggregated for purposes of determining the limit for the purposes of purchasing the underlying security.  Similarly, a separate computation whereby all put exercises over the past five business days are aggregated is required for purposes of determining sales of the underlying.

IMPORTANT INFORMATION

It's important to note that while exercise limits may be set at levels identical to position limits, it is possible for an account holder to reach an exercise limit without violating positions limits for a given option class.  This is because exercise limits are cumulative and one could conceivably purchase options up to the position limit, exercise those options and purchase additional options which, if allowed to be exercised within the five business day window, would exceed the limit.

Account holders are responsible for monitoring their cumulative options exercises as well as the exercise limit quantities to ensure compliance.  In addition, IB reserves the right to prohibit the exercise of any options, regardless of their intrinsic value or remaining maturity, if the effect of that exercise would be to violate the exercise limit rule.

簡介

到期前行使股票看漲期權通常不會帶來收益，因為：

• 這會導致剩餘期權時間價值的丟失；
• 需要更大的資金投入以支付股票交割；並且
• 會給期權持有人帶來更大的損失風險。

儘管如此，對於有能力滿足更高資金或借款要求并能承受更大下行市場風險的帳戶持有人來說，提前行使美式看漲期權行可獲取即將分派的股息。

背景

看漲期權持有人無權獲取底層股票的股息，因為該股息屬於股息登記日前的股票持有人所有。其他條件相同，股價應下降，降幅與除息日的股息保持一致。期權定價理論提出看漲期權價格將反映預期股息的折扣價格，看漲期權價格也可能在除息日下跌。最可能促成該情境與提前行權決定的條件如下：

1. 期權為深度價內期權，且Delta值為100；

2. 期權幾乎沒有時間價值；

3. 股息相對較高，且除息日在期權到期日之前。

舉例

為闡述這些條件對提前行權決定的影響，假設帳戶的多頭現金餘額為$9,000美元，且持有行使價為$90.00美元的ABC多頭看漲頭寸，10天后到期。ABC當前成交價為$100.00美元，每股股息為$2.00美元，明天是除息日。再假設期權價格和股票價格走勢相同，且在除息日下跌的幅度均為股息金額。

這裡，我們將檢查行權決定，目的是維持100股delta頭寸并使用兩種期權價格假設（一個為平價，一個高於平價）最大化總資產。

情境 1：期權價格為平價 - $10.00美元
如果期權以平價交易，提前行權可維持delta頭寸并可避免股票除息交易時多頭期權價值遭到損失，從而保護資產。在這裡現金收入被全數用於以行使價購買股票，期權權利金就此喪失，並且股票（扣除股息）與應收股息會記入帳戶。如果您想通過在除息日前賣出期權并買入股票來達到同樣的效果，請記得考慮佣金/價差：

情境 2：期權價格高於平價 - $11.00美元
如果期權以高於平價的價格交易，提前行權獲取股息則可能並不會帶來收益。在此情境中，提前行權可能會導致期權時間價值損失$100美元，而賣出期權買入股票在扣除佣金之後收益情況也可能不如不採取行動。在這裡，可取的行動為無行動。

請注意：考慮到空頭期權邊被行權的可能性，持有作為價差組成部分之多頭看漲頭寸的賬戶持有人應格外注意不行使多頭期權邊的風險。請注意，空頭看漲期權的被行權會導致空頭股票頭寸，且在股息登記日前持有空頭股票頭寸的持有人有義務向股票的借出者支付股息。此外，清算所行權通知處理週期不支持提交響應被行權的行權通知。

例如，假設SPDR S&P 500 ETF Trust (SPY)的信用看漲（熊市）價差包括100張13年3月到期行使價為$146美元的空頭合約，以及100張13年3月到期行使價為$147美元的多頭合約。在13年3月14日，SPY Trust宣布每股股息為$0.69372美元，並且會在13年4月30日向13年3月19日前登記的股東支付。因為美國股票的結算週期為3個工作日，想要獲取股息，交易者需要在13年1月14日之前買入股票或行使看漲期權，因為該日期一過，股票便開始除息交易。

13年3月14日，距離期權到期只剩一個交易日，平價成交的兩張期權合約每張合約的最大風險為$100美元，100張合約則為$10,000美元。但是，未能行使多頭合約以獲取股息以及未能避免空頭合約被其他想要獲取股息的交易者行權會使每張合約產生額外$67.372美元的風險，如果所有空頭看漲合約都被行權，則所有頭寸總風險為$6,737.20美元。如下表所示，如果空頭期權邊沒有被行權，則13年3月15日確定最終的合約結算價格時，最大風險仍為每張合約$100美元。

請注意，如果您的賬戶符合美國871(m)預扣稅要求，則除息日前平倉頭多期權頭寸並在除息日後重新建倉可能會帶來收益。

有關如何提交提前通知的信息請查看IB網站。

上方內容僅作信息參考，不構成任何推薦或交易建議，也不代表提前行權會成功或適合所有客戶或交易。帳戶持有人應諮詢稅務專家以確定提前行權可能帶來的稅務影響，并應格外注意以多頭股票頭寸替換多頭期權頭寸的潛在風險。

INTRODUCTION

Exercising an equity call option prior to expiration ordinarily provides no economic benefit as:

• It results in a forfeiture of any remaining option time value;
• Requires a greater commitment of capital for the payment or financing of the stock delivery; and
• May expose the option holder to greater risk of loss on the stock relative to the option premium.

Nonetheless, for account holders who have the capacity to meet an increased capital or borrowing requirement and potentially greater downside market risk, it can be economically beneficial to request early exercise of an American Style call option in order to capture an upcoming dividend.

BACKGROUND

As background, the owner of a call option is not entitled to receive a dividend on the underlying stock as this dividend only accrues to the holders of stock as of its dividend Record Date. All other things being equal, the price of the stock should decline by an amount equal to the dividend on the Ex-Dividend date. While option pricing theory suggests that the call price will reflect the discounted value of expected dividends paid throughout its duration, it may decline as well on the Ex-Dividend date.  The conditions which make this scenario most likely and the early exercise decision favorable are as follows:

1. The option is deep-in-the-money and has a delta of 100;

2. The option has little or no time value;

3. The dividend is relatively high and its Ex-Date precedes the option expiration date. 

EXAMPLES

To illustrate the impact of these conditions upon the early exercise decision, consider an account maintaining a long cash balance of $9,000 and a long call position in hypothetical stock “ABC” having a strike price of $90.00 and time to expiration of 10 days. ABC, currently trading at $100.00, has declared a dividend of $2.00 per share with tomorrow being the Ex-Dividend date. Also assume that the option price and stock price behave similarly and decline by the dividend amount on the Ex-Date.

Here, we will review the exercise decision with the intent of maintaining the 100 share delta position and maximizing total equity using two option price assumptions, one in which the option is selling at parity and another above parity.

SCENARIO 1: Option Price At Parity - $10.00
In the case of an option trading at parity, early exercise will serve to maintain the position delta and avoid the loss of value in long option when the stock trades ex-dividend, to preserve equity. Here the cash proceeds are applied in their entirety to buy the stock at the strike, the option premium is forfeited and the stock (net of dividend) and dividend receivable are credited to the account.  If you aim for the same end result by selling the option prior to the Ex-Dividend date and purchasing the stock, remember to factor in commissions/spreads:

SCENARIO 2: Option Price Above Parity - $11.00
In the case of an option trading above parity, early exercise to capture the dividend may not be economically beneficial. In this scenario, early exercise would result in a loss of $100 in option time value, while selling the option and buying the stock, after commissions, may be less beneficial than taking no action. In this scenario, the preferable action would be No Action.

NOTE:

Options have two components that make up their total premium value - intrinsic value and time value. The intrinsic value is the amount by which the option is in-the-money, while the time value represents the possibility that the option could become even more profitable before expiration as the underlying asset price fluctuates while providing protection against adverse moves.

Many options are American-style, which means they can be exercised early, ahead of their expiration date. Early exercise of an option eliminates the remaining time value component from the option's premium, since the option holder loses protection against unfavorable movements in the underlying asset’s price.

This makes early exercise suboptimal in most situations, as the option holder is willingly forfeiting a portion of the option's value.

There are a few specific circumstances where early exercise could make sense, such as:

• For call options on a stock that will pay dividends soon, where the dividend amount exceeds the remaining time value (and only if the exercise will settle on or prior to the record date for the dividend).
• For deep in-the-money options where the time value is negligible compared to the intrinsic value, and the option is expected to drop in value due to interest rate effects (PUTS), or expected stock loan benefits (CALLS).

The first case, exercising an in the money call immediately ahead of a dividend payment, is the most common economically-sensible early exercise. In most cases, it is advisable to hold or sell the option instead of exercising it early, in order to capture the remaining time value. An option should only be exercised early after carefully considering all factors and determining that the benefits of early exercise outweigh the time value being surrendered.

Account holders holding a long call position as part of a spread should pay particular attention to the risks of not exercising the long leg given the likelihood of being assigned on the short leg.  Note that the assignment of a short call results in a short stock position and holders of short stock positions as of a dividend Record Date are obligated to pay the dividend to the lender of the shares. In addition, the clearinghouse processing cycle for exercise notices does not accommodate submission of exercise notices in response to assignment.

As example, consider a credit call (bear) spread on the SPDR S&P 500 ETF Trust (SPY) consisting of 100 short contracts in the March '13 $146 strike and 100 long contracts in the March '13 $147 strike.  On 3/14/13, with the SPY Trust declared a dividend of $0.69372 per share, payable 4/30/13 to shareholders of record as of 3/19/13. Given the 3 business day settlement time frame for U.S. stocks, one would have had to buy the stock or exercise the call no later than 3/14/13 in order receive the dividend, as the next day the stock began trading Ex-Dividend. 

On 3/14/13, with one trading day left prior to expiration, the two option contracts traded at parity, suggesting maximum risk of $100 per contract or $10,000 on the 100 contract position. However, the failure to exercise the long contract in order to capture the dividend and protect against the likely assignment on the short contracts by others seeking the dividend created an additional risk of $67.372 per contract or $6,737.20 on the position representing the dividend obligation were all short calls assigned.  As reflected on the table below, had the short option leg not been assigned, the maximum risk when the final contract settlement prices were determined on 3/15/13 would have remained at $100 per contract.

Please note that if your account is subject to tax withholding requirements of the US Treasure rule 871(m), it may be beneficial to close a long option position before the ex-dividend date and re-open the position after ex-dividend.

For information regarding how to submit an early exercise notice please click here. 

The above article is provided for information purposes only as is not intended as a recommendation, trading advice nor does it constitute a conclusion that early exercise will be successful or appropriate for all customers or trades. Account holders should consult with a tax specialist to determine what, if any, tax consequences may result from early exercise and should pay particular attention to the potential risks of substituting a long option position with a long stock position.

Under Section 31 of the Securities Exchange Act of 1934, U.S. national securities exchanges are obligated to pay transaction fees to the SEC based on the volume of securities that are sold on their markets. Exchange rules require their broker-dealer members to pay a share of these fees who, in turn, pass the responsibility of paying the fees to their customers.

This fee is intended to allow the SEC to recover costs associated with its supervision and regulation of the U.S. securities markets and securities professionals. It applies to stocks, options and single stock futures (on a round turn basis); however, IB does not pass on the fee in the case of single stock futures trades.  Note that this fee is assessed only to the sale side of security transactions, thereby applying to the grantor of an option (fee based upon the option premium received at time of sale) and the exerciser of a put or call assignee (fee based upon option strike price).

For the fiscal year 2016 the fee was assessed at a rate of $0.0000218 per $1.00 of sales proceeds, however, the rate is subject to annual and,in some cases, mid-year adjustments should realized transaction volume generate fees sufficiently below or in excess of targeted funding levels.¹

Examples of the transactions impacted by this fee and sample calculations are outlined in the table below.

¹Information regarding current Section 31 fees may be found on the SEC's Frequently Requested Documents page located at: http://www.sec.gov/divisions/marketreg/mrfreqreq.shtml#feerate