What should I be aware of when exercising options

1. How to exercise options?

On the expiration date, if the option is out-of-the-money,  the option expired without the option being exercised. If the option is in-the-money, the option will be automatically exercised. The exercise will be accomplished by physical delivery.

For example, if you hold an AAPL 170314 140.00C, which is in-the-money on 3/14/17. The option contract will disappear from your account after the market closes, and your account will be charged $14,000 but added 100 AAPL shares.


2. What should be aware of when exercising options? Whether it is possible that the option exercise will fail?

When exercising options, please ensure that you have sufficient buying power in your account. Otherwise, Futu reserves the right to close in-the-money / nearly in-the-money options and not to exercise in-the-money options due to its own risk control.

If a client's account becomes "dangerous" due to various reasons after the exercise, Futu reserves the right to close positions for its own risk control.

During the trading hours on the expiry date, the system will continuously monitor the client's account position and the margin required for the exercise will be calculated from three hours before the close of the market. If the account becomes "Dangerous", clients can choose to close out the option and Futu also reserves the right to close out the option at any time. The buying power of the option will also be reduced from 3 hours before the close of the market.

For example, you have 3 in-the-money options on AAPL, of which the total market value is $3. The current price of AAPL is $200. And you need to have at least $29997 in your account to exercise the options.
This is calculated as follows.
200 (AAPL Market Price) * 3 (Number of Contracts) * 100 (Contract Size) * 50% (Initial Margin Ratio) - $3 = $29997.
Otherwise, Futu has the right to close the 3 in-the-money options on the expiry date or not to exercise the option.


3. Can an option be exercised early?

If you would like to exercise in advance, please contact our Hong Kong Customer Service at +852-2523 3588.

In general, the gains from early exercise are less than those obtained from closing the position. So it is recommended to give preference to closing options.


4. What is Options Assignment?

When you short an option, your counterparty is longing an option. Your counterparty has the right to exercise the option and you have the obligation to be assigned to exercise the option.

When an options assignment occurs, you must sell or buy stock to your counterparty at the price agreed upon on the option. The process is called an assignment.

Generally, in-the-money options will be exercised on the expiration date. If you hold an in-the-money short option on the expiration date, it is subject to assignment. In practice, the short option holder may not be assigned (the buyer abandons the exercise) or assigned out-of-the-money (the buyer initiates the exercise) because the buyer has the discretion to decide whether to exercise the option due to its own trading strategy.

For example, Trader A short an AAPL 170314 140.00C to Trader B. In this transaction, Trader A is a short call party and Trader B is a long call party. When Trader B exercises, Trader A is assigned to sell 100 shares of AAPL at $140 to Trader B.