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?
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 [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.
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.
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 early exercise is when investors exercise the relevant call options before the ex-dividend date in order to obtain dividends from the underlying shares.
To submit an early exercise or lapse request in the app, go to Accounts > Tap any Account > More > Option Exercise.
Submission Period: You may submit an early exercise or lapse request at any time from when you open the options position until before its expiration. Please note that any requests submitted after the market closes on the expiration date will not be processed.
Once you submit the request, we will confirm you have the buying power required for the option exercise, then process your request. For more details, please contact us at +852-2523 3588.
Please note: A lapse request takes effect after the market closes on the expiration date. If you submit a lapse request and do not close the options position by market close on the expiration date, the options you hold will expire worthless and will not be exercised automatically, regardless of whether they are in the money. In that case, you shall be solely responsible for any potential losses incurred.
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:
● 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.
● 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.
● 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.
● 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, Futu begins to calculate the margin and settlement requirements for options that are in-the-money or close to in-the-money at unspecified times before the market close. How it’s calculated:
i. The projected margin requirement is calculated based on the assumption that your in-the-money and close to in-the-money options will be exercised or assigned.
ii. Please note that margin requirement reductions for option strategies may not apply in the projection if after exercise some of your positions are reversed, i.e., from long to short or vice versa.
Example: Suppose you are short 100 AAPL shares and long 2 AAPL call spreads, with only the 2 long calls being in-the-money. After exercise, your holdings will consist of 100 AAPL long shares and 2 AAPL short calls. The margin requirement will be calculated based on these individual holdings. The system will not combine the 100 AAPL long shares and 1 AAPL short call to form a covered call strategy. As a result, no margin requirement reduction is allowed and the required margin may be higher than your estimation.
iii. The system will adopt the higher value between the projected and current margin requirements.
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", Futu 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.
Remark: The range of "close to being in-the-money" of an option is determined by the proportion of the exercise price exceeding the underlying price. The proportion threshold is determined by the company in its complete discretion. Generally, the threshold for U.S. stock options is within 1%. The Company will adjust the relevant definition based on the prevailing market conditions.
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 account will have a cash amount of -100 * 150 = -$15,000, and a market value of 100 * 200 = $20000
● The account ELV remains unchanged before and after the exercise, which is still 20,000 - 15,000 = $5,000
● 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 supply the shortfall here which is 10,000 - 5,000 = $5,000 in order to ensure a successful option exercise.
If you have an unfilled close-to-expiry option order on the day of contract expiration, Futu will calculate the margin required for the exercise and settlement of the option assuming the order is filled. If the account becomes risky, Futu reserves the right to cancel such orders.
Usually, when a close-to-expiry option order is cancelled, it may be because you submitted the order before the expiration risk control was running, but that pending order has subsequently triggered the relevant alarms as time moves closer to market close.