MGMT310_lecture25

MGMT310_lecture25 - What Whathappenswhenoptionisexercised?

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hat happens when option is exercised? What happens when option is exercised? Suppose you are holder of option and want to exercise 1. You notify your broker, who in turn notifies the Options Clearing Corporation (OCC) 2. The OCC will randomly choose a member/broker with outstanding short position on the same option 3. This member/broker will in turn select an investor (one of its clients) who has written the option The investor is said to be assigned He must buy/sell @ strike price hat keeps is assigned investor from defaulting on his bligation? What keeps this assigned investor from defaulting on his obligation? (margin requirements!)
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What is a margin account? Loosely speaking, if you take a position where you could owe more than you what you initially put in, you’ll need to maintain a margin account to decrease credit/default risk amples of trades w/ margin requirements: Examples of trades w/ margin requirements: Buying stock on margin Short selling stock Write call/put option /p p Buy/sell futures contracts Margin requirements are higher for speculators than for hedgers Also, different requirements for pattern day traders It’s your responsibility to make sure you are meeting maintenance requirements!! Broker may issue margin call, but is allowed to liquidate your position without your
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MGMT310_lecture25 - What Whathappenswhenoptionisexercised?

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