EFTA01353502.pdf

(discussed below), its writer is required to maintain mar- gin with his brokerage firm. Moreover, the writer's pur- chase of the underlying interest upon being assigned an exercise of a physical delivery put may result in an addi• tional margin call. The second fullparagraph onpage 64 of the Booklet is replaced with the following paragraph: Put writers must have an understanding of the risks, the financial capacity and willingness to incur potentially substantial losses. and the liquidity to meet margin requirements and to buy the underlying Interest, or to pay the cash settlement amount, in the event the option is exercised, A writer of an American-style put other than a delayed-start option can be assigned an exercise at any time during the life of the option until such time as he enters into a closing transaction with respect to the option. A writer of an American-style delayed-start option can be assigned an exercise at any time alter the option's exercise price is set until such time as he enters into a closing transaction with respect to the option. Since exer- cise will ordinarily occur only if the market price of the underlying interest is below the exercise price of the option, the writer of a physical delivery put option can expect to pay more for the underlying interest upon exer- cise than its then market value. The following example is inserted immediately fol- lowing the example at the bottom of page 64 of the Booklet: EXAMPLE: An investor receives a premium of $4 for writing a binary put option on XYZ security that has an exercise price of $80 and a fixed cash settlement amount of $100. If the exercise settlement value of XYZ is $79 at expiration, the Investor will Incur a loss of $96 (the $100 paid to the holder of the put option less the $4 premium received when the option was written). The first full paragraph at the top of page 65 of the Booklet is replaced with the following paragraph: In the case of a put other than a binary put, the put writer's exposure to margin requirements can be elimi- nated if the put writer deposits cash equal to the option's exercise price with his brokerage firm. Under this strat- egy. known as cash-secured put writing, the put writer is not subject to any additional margin requirements regardless of what happens to the market value of the underlying interest. In the meantime, the put writer might earn interest by having the cash Invested in a short-term debt instrument — for example. in a Treasury bill. How- ever, a cash-secured put writer is still subject to a risk of loss if the value of the underlying interest declines. The 139 CONFIDENTIAL - PURSUANT TOCFEESCIR11OB11M900 P. 6(e) CONFIDENTIAL SDNY_GM_00184084 EFTA01353502