EFTA01393100.pdf

This period is the expiration date for all capped op- tions traded at the date of this booklet. The special terminology applicable to capped options is dis- cussed at the end of this chapter. European-style or capped options having an expira- tion period that is longer or shorter than their expiration date may be introduced for trading in the future. UNIT OF TRADING; CONTRACT SIZE—The unit of trading (which is sometimes referred to as the contract size) of a physical delivery option is the amount of the underlying interest that is subject to being purchased or sold upon the exercise of a single option contract. For example. the unit of trading for most options on equity securities is 100 shares. Thus. a physical deliv- ery XYZ 50 call will give its holder the right upon exer- cise to purchase 100 shares of XYZ at 550 per share. If the option is trading at a premium of, say, $4 per share, then the aggregate premium for a single option con- tract would be $400. The contract size of a cash-settled option is deter- mined by the multiplier that is fixed by the options market on which the options series is traded. The multiplier determines the aggregate value of each point of the difference between the exercise price of the option and the exercise settlement value of the underlying interest. For example, a multiplier of 100 means that for each point by which a cash-settled op- tion is in the money upon exercise. there is a $100 increase in the cash settlement amount. Similarly, if an option with a multiplier of 100 is trading at a premium of, say, $4, then the aggregate premium for a single option contract would be $400. EXERCISE—If the holder of a physical delivery option wishes to buy (in the case of a call) or sell (in the case of a put) the underlying interest at the exercise price— or, in the case of a cash-settled option. to receive the cash settlement amount—his option must be exer- cised. In order to exercise most options, option hold- ers must give exercise instructions to their brokerage firm in accordance with the firm's procedures prior to the firm's exercise cut-off time. The exercise process is discussed in Chapter VIII. Every option holder should understand this process and should learn his broker- age firm's procedures concerning exercise, and its ex- ercise cut-off time, for each option he may buy. Although an option holder must assure that action is taken to exercise most options, capped options and 8 CONFIDENTIAL - PURSUANT TOEEBEIMP0S6493 P. 6(e) CONFIDENTIAL SDNY_GM_00244677 EFTA01393100