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Incidence of Option Exercises: A Look at Some Common Examples

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One of the most frequent inquiries received by the Exchange is – how likely are options to be exercised or not? Certainly the most actively traded options tend to be somewhat out-of-the-money with generally lower premiums than at- or in-the-money options. Thus, we would expect that the proportion of exercised options might be reasonably small.

In order to address this issue, we investigate the number of options exercised in the context of the two most actively traded of CME Group option markets in the form of the options on Eurodollar futures and options on (standard) S&P 500 futures.

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Incidence of Option Exercises: A Look at Some Common Examples

  1. 1. IncidenceofOptionExercise SEPTEMBER 3, 2013 John W. Labuszewski Marian Rough Managing Director Intern Research & Product Development 312-466-7469 jlab@cmegroup.com Research & Product Development 312-930-3079 Marian.rough@cmegroup.com
  2. 2. 1 | Incidence of Option Exercise | September 3, 2013 | © CME GROUP A frequent inquiry received by the Exchange revolves around the final disposition of options, specifically how many options are ultimately exercised as opposed to abandoned. Certainly the most actively traded options tend to be somewhat out-of-the-money with generally lower premiums than at- or in-the-money options. Thus, we would expect that the proportion of exercised options might be reasonably small. In order to address this issue, we investigate the number of options exercised in the context of the two most actively traded of CME Group option markets in the form of the options on Eurodollar futures and options on (standard) S&P 500 futures. Specifically, we examined the proportion of outstanding options which were exercised at termination of trade in these two markets. 1 This study was confined to the prior four (4) quarterly expirations from September 2012 through June 2013. Eurodollar Options The incidence of exercise in the context of the option on Eurodollar futures market was 44.5% over the past four quarterly expirations. This was very consistently distributed across calls (44.2%) and puts (44.7%). However, the incidence of exercises was quite different amongst puts and calls during any specific expiration and over time. This, however, might readily be explained by reference to price movements preceding each of the quarterly expirations. E.g., prior to the September 2012 expiration, Eurodollar futures were generally advancing, driving calls into-the-money. But the market reversed downwards a bit going into the September 2012 1 This may be regarded as a “convenience sample” to the extent that American-style options such as those predominantly offered in CME Group markets may be exercised prior to the termination of trade. But the numbers tend to be few. Note further that, held until termination of trade, in-the-money Eurodollar and S&P 500 options are subject to an automatic exercise in the absence of contrary instructions on the part of option holders. expiration, thereby driving some number of accumulated put positions a bit into-the-money as well. Thus, we see a rather high incident of exercised put (72.1%) and call (57.1%) options in this month. Eurodollar Option Exercises Type Expiration Exercised Open Interest (%) Call Sep-12 478,710 838,015 57.1% Put Sep-12 1,229,591 1,706,560 72.1% Call Dec-12 140,246 740,192 18.9% Put Dec-12 862,378 1,663,811 51.8% Call Mar-13 376,437 664,577 56.6% Put Mar-13 17,914 757,267 2.4% Call Jun-13 244,470 560,351 43.6% Put Jun-13 21,618 644,648 3.4% All Calls 1,239,863 2,803,135 44.2% All Puts 2,131,501 4,772,286 44.7% Total 3,371,364 7,575,421 44.5% E.g., Eurodollar futures were reasonably stable approaching the June 2013 expiration. But they did generally advance a bit just prior to the expiration, driving accumulated call positions into-the-money. To the extent that the June 2013 futures settled on the last day of trading at 99.7267, very few outstanding puts would have had higher strikes and fallen into-the-money. Thus, some 43.6% of calls but only 3.4% of puts were exercised. While Eurodollar futures generally rallied during the period addressed by this study, note that the range over which the market trended was not terribly wide. Further, much of the fluctuation occurred prior to the September 2012 expiration. This factor 99.45 99.50 99.55 99.60 99.65 99.70 99.75 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Eurodollar Futures Sep-12 Futures Dec-12 Futures Mar-13 Futures Jun-13 Futures
  3. 3. 2 | Incidence of Option Exercise | September 3, 2013 | © CME GROUP generally accounts for the balanced nature of exercises in Eurodollar futures. S&P 500 Options The incidence of exercises in S&P 500 options was much more skewed to call options (31.2%) as opposed to put options (only 3.4%). This may be attributed to the rather dramatic advance in equity markets over the period from mid-2012 to mid- 2013. S&P 500 Option Exercises Type Expiration Exercised Open Interest (%) Call Sep-12 36,220 73,284 49.4% Put Sep-12 723 176,680 0.4% Call Dec-12 20,918 85,964 24.3% Put Dec-12 3,139 208,167 1.5% Call Mar-13 35,392 62,794 56.4% Put Mar-13 0 192,498 0.0% Call Jun-13 4,940 90,122 5.5% Put Jun-13 22,906 206,110 11.1% All Calls 97,470 312,164 31.2% All Puts 26,768 783,455 3.4% Total 124,238 1,095,619 11.3% U.S. equities, as measured by the S&P 500 climbed to new all-time highs by early June 2013. Thus, we see a rather high proportion of exercises in call options. E.g., during the September 2012 expiration, some 49.4% of calls still outstanding by the option expiration date were in-the-money and exercised. E.g., during the March 2013 expiration period, some 56.4% of calls were exercised. E.g., approaching the June 2013 expiration, however, the market fell into a mild correction. Thus, put exercise (11.1%) exceeded call exercise (5.5%) by a modest margin. Conclusion The results confirm our hypothesis as we embarked upon this simple investigation. Specifically, inexpensive out-of-the-money options tend to attract higher volumes and accumulate greater open interest than more expensive in-the-money options. Thus, a relatively small proportion (<50%) of options outstanding by expiration fall in-the-money and are exercised. These results are, of course, skewed by market trends. Specifically, calls are driven in-the-money during bull markets and tend to be exercised with greater frequency than puts. Of course, puts are driven in-the-money during bear markets and are exercised with greater frequency than calls. To learn more about CME Group option markets, please visit our website at www.cmegroup.com/options. 1,300 1,350 1,400 1,450 1,500 1,550 1,600 1,650 1,700 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 S&P 500 Futures Sep-12 Futures Dec-12 Futures Mar-13 Futures Jun-13 Futures
  4. 4. 3 | Incidence of Option Exercise | September 3, 2013 | © CME GROUP Copyright 2013 CME Group All Rights Reserved. Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. CME Group is a trademark of CME Group Inc. The Globe logo, E-mini, Globex, CME and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. Chicago Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is a trademark of the New York Mercantile Exchange, Inc. All other trademarks are the property of their respective owners. References to CME Clearing are to CME’s U.S. Clearinghouse. S&P®, S&P 500® and Select Sector indices are trademarks of S&P/Dow Jones Indices LLC (¿S&P¿) and its affiliates (including Standard & Poor¿s Financial Services LLC)and have been licensed for use by Chicago Mercantile Exchange Inc. The information within this document has been compiled by CME Group for general purposes only and has not taken into account the specific situations of any recipients of the information. CME Group assumes no responsibility for any errors or omissions. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules. Current CME/CBOT/NYMEX rules should be consulted in all cases before taking any action.

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