Understanding Equity Options - The Options Clearing Corporation

Exercising the OptionIf the holder of an equity option decides to exercisehis right to buy (in the case of a call) or to sell (inthe case of a put) the underlying shares of stock,the holder must direct his broker (if an OCC clearingmember) to submit an exercise notice to OCC.In order to ensure that an option is exercised on aparticular day, the holder must notify his broker beforethe broker’s cut-off time for accepting exerciseinstructions on that day. Different firms may havedifferent cut-off times for accepting exercise instructionsfrom customers, and those cut-off times may bedifferent for different classes of options.OCC will then assign this exercise notice toone or more clearing members with short positionsin the same series in accordance with its establishedprocedures. If the exercise is assigned to a clearingmember’s customers’ account, the clearing memberwill, in turn, allocate the exercise to one or more ofits customers (either randomly or on a first in firstout basis) who hold short positions in that series. Theassigned clearing member will then be obligated tosell (in the case of a call) or buy (in the case of a put)the underlying shares of stock at the specified strikeprice. Generally speaking, OCC clearing memberssettle the delivery and payment obligations arisingfrom the exercise of a physically-settled equity optionthrough the facilities of the correspondent stockclearing corporation.The Expiration ProcessAn equity option usually begins trading about eightmonths before its expiration date, and trades on oneof three expiration cycles. However, because of thesequential nature of these cycles, some options havea life of only one to two months. At any given time,an equity option can be bought or sold with one offour expiration dates as designated in the expirationcycle tables which can be found in the Appendix.Exceptions to these guidelines are LEAPS, discussedbelow, Weeklys and Quarterlys.The expiration date is the last day an optionexists. For listed equity options, except Weeklys andQuarterlys, this is the Saturday following the third12