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Option Positions and Exercise Limits
By William H. Mears; CPA, JD
The Options Clearing Corporation [OCC] places certain limits on the number of contracts that can be outstanding on each side of the market for individual securities. These position limits vary from underlying security to underlying security. However, they range from 4,500 to 10,500 contracts. The number of contracts allowed will vary based on the volume and outstanding shares of each issue.
Limits
Additionally, there are limits to the number of same-side-of-the-market contracts that each physician-investor or other person can exercise within a three-or-five-consecutive-business-day period depending on market condition. Long calls and short puts are on the same side of the contract because they are both bullish strategies. Long puts and short calls are bearish strategies.
Covered options
—For a call seller to be considered covered, he or she must either own the underlying stock or convertibles or produce an escrow showing that the stock is on deposit at another brokerage firm and will be delivered if necessary.
—To be covered, a put writer must have cash on deposit with the brokerage firm equal to the aggregate strike price or be short in the underlying stock.
Uncovered options
—A minimum of $2,000 must be deposited in a margin account. Additionally, maintenance margin requirements may apply in the future.
Margin requirements
Options contracts are regulated by the Federal Reserve Board under “Regulation-T” and by the rules and regulations of each brokerage firm and exchange. Options must be fully paid for within seven days of purchase and are settled on a next-day basis.
Assessment
Generally, options cannot be purchased on margin, but occasionally firms will allow clients to do so. The margin requirements for covered options are different from those of uncovered options.
Conclusion
Do you use options and what strategies do you employ; please comment?
Related Information Sources:
Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
Financial Planning: http://www.jbpub.com/catalog/0763745790
Risk Management: http://www.jbpub.com/catalog/9780763733421
Healthcare Organizations: www.HealthcareFinancials.com
Administrative Terms: www.HealthDictionarySeries.com
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