Options FAQ's

Please see below for a list of commonly asked questions about Options. If you can't find the answer to your question below, please contact your William Shaw advisor.

I am holding written call options in the money, will I be exercised?

Exercise of a call rarely takes place until close to expiry. When the taker of a call option exercises early, he sacrifices any time value remaining in the option, and also must pay for the underlying shares ahead of the option's expiry. The only time early exercise is likely is when an investor holds in-the-money call options over shares that are about to pay a dividend. In that case, the exercise will take place before the stock goes ex-dividend.

The following table sets out the rule of thumb for the two situations when an American style call option is likely to be exercised ahead of expiry:  

Interest expense is calculated by:

Strike price (in cents) X Cash rate (%)    
365 X Days till expiry

The best way to think about this is that if someone is to exercise you early and buy your shares, they must take money out of the bank to settle the trade. This money is now no longer receiving interest. This is the interest expense.

When the taker of the call option buys your shares, they will also buy a put to protect themselves.

Therefore the dividend payments must be greater than the interest expense and the opposing put option for an early exercise to occur.

I am holding written put options in the money, will I be exercised?

Whenever the share price is below the exercise price of the option, the put writer is exposed to the possibility of being exercised. Early exercise is much more of a risk for the put option writer that for the call option writer.

Below sets out the rule of thumb for when an in-the-money American put option is likely to be exercised ahead of expiry:

Consider an example where an investor owns both stock and a put option over the same stock, and the put is trading at intrinsic value (as is often the case when the option is deep in the money). By exercising early, the holder of the put sells their shares at the exercise price of the option and earns interest on the proceeds earlier than if they were to wait until expiry to exercise. This usually occurs after the stock has gone ex-dividend, so that the dividend is retained by the shareholder.

Another way of looking at whether the put should be exercised early is to compare the value of the corresponding call option with the cost of carrying the underlying stock to expiry. The importance of this relationship is due to the fact that stock ownership plus a long put is an equivalent position to holding a call option with the same strike price and expiry. The two strategies are said to be synthetically equivalent.

Both positions, stock and long put, and the long call, profit if the stock goes up and limit losses if it falls. Therefore, if one can in effect exchange the synthetic position for its equivalent, and the cost of doing so (ie. the cost of the call) is less than the interest earned on the funds received from selling the stock, the early exercise of the put is worthwhile.

This simple arbitrage relationship is known as put/call parity, and is the fundamental relationship of option pricing.

When do Exchange Traded Options (ETO's) on the ASX expire?

Thursday before last Friday of the settlement month. This may change due to public holidays.
Print out your own copy of the 2007 ETO expiry calendar.

What are the contract specifications for options traded on the ASX?

Please refer to the ASX website for ETO contract specifications.

Why did my options get adjusted?

Please refer to the ASX publication Explanatory Guide for Option Adjustments.