EFTA01353417.pdf

EXAMPLE: An XYZ 40 call gives the buyer the right to purchase 100 shares of XYZ stock at a price of $40 per share, or a total price of $4,000. In the future. stock options may, with regulatory ap- proval, be introduced that have exercise prices in a foreign currency. Adjustments may be made to certain of the stan- dardized terms of outstanding stock options when cer- tain events occur, such as a stock dividend, stock distribution, stock split, reverse stock split, rights offer- ing, distribution, reorganization, recapitalization. reclassification in respect of an underlying security, or a merger. consolidation, dissolution or liquidation of the issuer of the underlying security. In the following discussion, there is a brief description of a number of general adjustment rules applicable to stock options that are in effect at the date of this booklet. Such rules may be changed from time to time with regulatory approval. An adjustment panel has the authority to make such exceptions as it determines to be appropri- ate to any of the general adjustment rules. As a general rule, no adjustment is made for ordi• nary cash dividends or distributions. A cash dividend or distribution by most issuers will generally be consid- ered "ordinary" unless it exceeds 10% of the aggre- gate market value of the underlying security outstanding. The options markets are considering an amendment to the general rules which, it adopted and approved by the regulators, would provide that a cash dividend or distribution by an issuer that is a closed- end investment company may not be considered to be "ordinary" if it exceeds 5% of such aggregate market value. Determinations whether to adjust for cash divi- dends or distributions in excess of those amounts are made on a case-by-case basis. Because stock options are not generally adjusted for ordinary cash dividends and distributions, covered writers of calls are entitled to retain dividends and dis- tributions earned on the underlying securities during the time prior to exercise. However, a call holder be- comes entitled to the dividend if he exercises the op- tion prior to the ex-dividend date even though the assigned writer may not be notified that he was as• signed an exercise until after the ex-date. Because call holders may seek to "capture" an impending dividend by exercising, a call writer's chances of being assigned an exercise may increase as the ex-date for a dividend on the underlying security approaches. 19 CONFIDENTIAL - PURSUANT TOMESERLYO08".780 P. 6(e) CONFIDENTIAL SDNY_GM_00183964 EFTA01353417