Expiration Process and Risks

Expiration, Exercising and Associated Risks

OptionsHouse is furnishing this document to you to provide some basic facts about the options expiration process and the risks associated with exercising and expiring options. This document is not intended to enumerate all of the risks entailed in the exercise or expiration process. Before trading options, you should fully understand the risks of trading options. It is expected that you will read the booklet entitled Characteristics and Risks of Standardized Options. If you have any questions about the exercise or expiration process, email us at [email protected]

Early Exercise of Options

If you wish to exercise an option contract prior to the last business day before expiration (“Expiration Friday”)** you must submit an exercise request to OptionsHouse by 3:00 PM CT (4:00 PM ET). Failure to do so will result in the contracts not being exercised.

In-the-Money Options May Automatically Exercise

The Options Clearing Corporation (OCC) will automatically exercise any expiring options that close in-the-money by $0.01.

Some In-the-Money Options May Not Automatically Exercise

The OCC will not automatically exercise expiring options that close in-the-money by less than $0.01. These options may still be exercised, but you are required to provide OptionsHouse with an exercise request by 3:20 PM CT (4:20 PM ET) to exercise these options. Furthermore, if you do not want to exercise option contracts that automatically would be exercised, you must provide OptionsHouse with such a request by 3:20 PM CT (4:20 PM ET).

Exercises, Assignments and Your Account Equity

You should review your positions prior to expiration to determine whether you have adequate equity in your account prior to exercising options. You should also determine whether you have adequate equity in the account if a short options position is assigned to your account. It may make sense to close positions in expiring options prior to the market close to avoid the risks if you do not have adequate capital in your account, or if you do not want to bear the risks associated with a long or short stock position. Also, you should consider the possibility that you may be assigned on a short option position even if the option is out-of-the-money.

OptionsHouse May Buy or Sell in Your Account to Manage Expiration Risk

OptionsHouse reserves the right to liquidate or cover expiring option positions which would result in undue risk and/or margin deficit related to exercise or assignment.

Accounts with insufficient equity on hand prior to exercise or assignment are subject to undue risk as a result of an adverse price change in the underlying security upon delivery.  To protect against the excessive risk of an adverse movement in the underlying security, OptionsHouse may intervene and manage the risk on your behalf.  Such intervention may include closing out existing positions, buying or selling stock against expected exercises or assignments, or entering “Do Not Exercise” instructions for positions expiring in-the-money.  Failure by a customer to effectively manage the risk of expiring positions may also result in the account being restricted from opening new positions to limit any further increase in exposure.

OptionsHouse initiates expiration-related liquidations 2 hours prior to the close but does reserve the right to  begin the process sooner or later if conditions warrant any alteration.

OptionsHouse is under no obligation to manage such risks and we expect each customer to actively manage and mitigate the potential risks involved with expiring option positions.

Spreads and Expiration Risk

Spread positions can have unique expiration risks associated with them. An expiring spread where the long leg of the spread is in-the-money by less than $0.01 and the short leg of the spread is in-the-money more than $0.01 may require special attention on your part to manage the expiration risks. You are responsible for managing this risk and for risks associated with any unhedged spread legs that expire in-the-money. If you do not want to exercise an expiring in-the-money leg of a spread, you must notify OptionsHouse by 3:00 CT (4:00 ET).

The Assignment Process

Apex Clearing Corporation processes the assignments made by OCC to customers with short options positions on a random basis. Apex Clearing Corporation will process assignments and exercises in your account on the Sunday following expiration.

Managing Risks Following Expiration

You may need to review your account and manage any positions that generate margin or risk resulting from exercises or assignments on the trading day following expiration. You are responsible for trading position that result from the expiration process. If you do not take appropriate action, you may receive a margin call or OptionsHouse may liquidate positions in your account.