EFTA01393103.pdf

POSITION LIMITS—The rules of the options markets generally limit the maximum number of options on the same side of the market (Le., calls held plus puts writ• ten, or puts held plus calls written) with respect to a single underlying interest that may be carried in the accounts of a single investor or group of investors acting in concert. These limits—which are called posi- tion limits— differ for options on different underlying interests. Information concerning the position limits for particular options is available from the options market on which those options are traded or from brokerage firms. COMBINATIONS; SPREADS and STRADDLES— Combination positions are positions in more than one option at the same time. Spreads and straddles are two types of combination positions. A spread involves being both the buyer and writer of the same type of option (puts or calls) on the same underlying interest, with the options having different exercise prices andior expiration dates. A straddle consists of purchasing or writing both a put and a call on the same underlying interest. with the options having the same exercise price and expiration date. LONG and SHORT—The word long refers to a per- son's position as the holder of an option, and the word short refers to a person's position as the writer of an option. COVERED CALL WRITER—If the writer of a physical delivery call option owns or acquires the amount of the underlying interest that is deliverable upon exercise of the call, he is said to be a covered call writer. EXAMPLE: An individual owns 100 shares of XYZ common stock. If he writes one physical delivery XYZ call option—giving the call holder the right to purchase 100 shares of the stock at a specified exercise price—. this would be a covered call. If he writes two such XYZ calls, one would be covered and one would be uncovered. The distinction between covered and uncovered call writing positions is important since uncovered call writ- ing can involve substantially greater exposure to risk than covered call writing. A call option writer who is not a covered writer may hold another option in a spread position and thereby offset some or all of the risk of the option he has written. However, the spread may not offset all of the risk of the uncovered writing position. For example, if the long portion of the spread has a 13 CONFIDENTIAL - PURSUANT TOD0ESERNDH0SE498 P. 6(e) CONFIDENTIAL SDNY_GM_00244682 EFTA01393103