Options Glossary: E

Early exercise

A feature of American-style options that allows the owner to exercise an option at any time prior to expiration.

Equity

In a margin account, equity is the difference between the securities owned and the margin loans owed. The investor keeps this amount after all positions are closed and all margin loans paid off.

Equity option

An option on shares of an individual common stock or exchange traded fund.

Equivalent strategy

A strategy that has the same risk-reward profile as another strategy. For example, a long May 60-65 call vertical spread is equivalent to a short May 60-65 put vertical spread. See also Synthetic position.

European-style option

An option that can be exercised only during a specified period just prior to expiration. See also American-style option.

Ex-date / Ex-dividend date

The day before the date that an investor must have purchased the stock in order to receive the dividend. On the ex-dividend date, the previous day's closing price is reduced by the amount of the dividend because purchasers of the stock on the ex-dividend date will not receive the dividend payment. This date is sometimes referred to simply as the ex-date, and can apply to other situations (e.g., splits and distributions). If you purchase a stock on the ex-date for a split or distribution, you are not entitled to the split stock or that distribution. However, the opening price for the stock will have been reduced by an appropriate amount, as on the ex-dividend date. Weekly financial publications, such as Barron's, often include a stock's upcoming ex-date as part of their stock tables.

Exchange traded funds (ETFs)

Exchange traded funds (ETFs) are index funds or trusts listed on an exchange and traded in a similar fashion as a single equity. The first ETF came about in 1993 with the AMEX's concept of a tradable basket of stocks— Standard & Poor's Depositary Receipt (SPDR). Today, the number of ETFs that trade options continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio (or a bond portfolio) as a single security. Exchange traded funds allow investors to enjoy some of the more favorable features of stock trading, such as liquidity and ease of equity style, in an environment of more traditional index investing.

Exercise

To invoke the rights granted to the owner of an option contract. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.

Exercise by exception processing

A procedure used by OCC as an operational convenience for clearing members. Under these proceedings, OCC assumes a clearing member tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so. This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options held in customer accounts are exercised if they are in-the-money by a specified amount.

Exercise price

The price that the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with strike or strike price.

Exercise settlement amount

The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised.

Expiration cycle

The expiration dates applicable to the different series of options. Traditionally, there were three cycles:

Cycle Available expiration months
January January, April, July, October
February February, May, August, November
March March, June, September, December

Today, equity options expire on a hybrid cycle that involves four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April and July. After the January expiration, the months outstanding will be February, March, April and July.

Expiration date

The date that an option and the right to exercise it cease to exist.

Expiration Friday

The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately preceding the third Friday.

Expiration month

The month that the expiration date occurs.

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