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Option exercise & settlement

1. How are stock options exercised and settled?

2. How can I early exercise options or waive my exercise rights?

3. Why is the margin requirement higher for close-to-expiry options?

4. How to calculate the amount of funds required to exercise an option?

5. Why are my option orders cancelled in certain cases?


1. How are stock options exercised and settled?

The vast majority of exercises are automatically carried out based on the closing settlement price on the contract expiration date. If you, as the option purchaser, need to exercise early or waive your rights to exercise, please refer to [link: How can I early exercise options or waive my exercise rights]

As the option purchaser, if the option is out of the money on the expiration date, the expired option will have no value and there will be no exercise taken place; if the moneyness of the option is equal to or higher than $0.01, the option will be automatically exercised, which will be completed in the form of a physical delivery of the underlying shares.

As the option seller, when the option is exercised by the purchaser, the option clearing house will randomly match the open short position with the exercised option. If your account is assigned, you must either deliver the underlying stock (in case of a call option) or buy the underlying stock (in case of a put option).

Generally speaking, in-the-money options are exercised when they expire. If you are short an in-the-money option on the expiry date, you will most likely be assigned. The purchaser may also choose to waive the exercise rights or early exercise the option regardless of the actual moneyness.


2. How can I early exercise options or waive my exercise rights?

Generally speaking, it is less profitable to early exercise than to sell out of the position. It is usually not recommended to exercise the option early because you're forfeiting the remaining time value of the option. However, when the option is deep in-the-money*, there will be very little time value left; coupled with poor liquidity, it may not be possible to close the position at a reasonable price. In such cases, investors may choose to exercise the option early. Another reason for investors to exercise early is when investors exercise the relevant call options before the exdividend date in order to obtain dividends from the underlying shares.

If you would like to exercise your options early or waive your exercise rights, please contact customer service at cs@us.moomoo.com, Moomoo Financial Inc. will proceed after confirming the investor’s intention to exercise and the purchasing power of the account required for the exercise.

*deep-in-the-money means that a call option's strike price being significantly below,or a put option's strike being significantly above, the market price of the underlying asset


3. Why is the margin requirement higher for close-to-expiry options?

Close-to-Expiry options are options that are within 5 trading days to expiry.

Generally at expiry, your option position may undergo the following changes:

1. When you have a long call position that is exercised, it will become a long position of the underlying stock, and the account will deduct the cash required to establish the position.

2. When you have a long put position that is exercised, it will become a short position of the underlying stock, and the account will increase the amount of cash corresponding to the short position.

3. When you have a short call position that is assigned, it will become a short position of the underlying stock, and the account will increase the amount of cash corresponding to the short position.

4. When you have a short put position that is assigned, it will become a long position of the underlying stock, and the account will deduct the cash required to establish the position.

To better monitor the risks associated with the possible option exercises on the expiration day, Moomoo Financial Inc. begins to calculate the margin and settlement requirements for options that are in-the-money or close to in-the-money (close meaning within 1% of the exercise price) on the day of expiration usually 3 hours before market close. Not having enough funds for the potential exercise, will lead to the account being marked as "dangerous" from a risk control perspective. Customers should ensure the account has sufficient liquidity for option exercise via closing positions or injecting more funds.

In the case that your account is marked as "dangerous", Moomoo Financial Inc. reserves the right to perform the following actions: 1) liquidate your option positions; 2) waive your right to option exercises; 3) execute the option exercise but close the corresponding stock positions afterwards, etc.


4. How to calculate the amount of funds required to exercise an option?

Assume that the customer holds an option position FUTU 210514 150C, and there is no other positions or excess cash. On the expiration date, the underlying price of FUTU is $200. Assuming that the option has no time value, then the value of the client's option holding at this moment is: (current price - exercise price) * contract size * number of positions = (200 - 150) * 100 * 1 = $5000.The client's equity loan value (ELV) = initial margin requirement (IM) = $5000, where all of the ELV comes from the option holding.

Exercising this in-the-money option at expiry means that the value of the option goes to zero, and correspondingly a position of the underlying stock is opened at the exercise price.

In the above example, the option value of $5,000 goes to zero, and 100 shares of FUTU are bought at a price of $150, therefore:

  ● The purchase price of the underlying shares is $150 * 100 = $15000. since the market price of those shares is $200 * 100 = $20000,the account will have an ELV balance of 20,000 - 15,000 = $5,000, which remains unchanged before and after the exercise.

  ● The initial margin requirement has changed from $5,000 for a single option to the initial margin requirement for 100 shares of the underlying stock, which is 20,000 * 50% = 10,000 (assuming the stock margin requirement is 50%).

Because of this increase in the margin requirement, the account is deemed "insufficient" in funds needed for the exercise.

Therefore, the client needs to make up the difference here which is 10,000 - 5,000 = $5,000 in order to ensure a successful option exercise.


5. Why are my option orders cancelled in certain cases?

If you have an unfilled close-to-expiry option order on the day of contract expiration, Moomoo Financial Inc. will calculate the margin required for the exercise and settlement of the option assuming the order is filled. If the account becomes risky, Moomoo Financial Inc. reserves the right to cancel such orders.