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Exercise Limits

Rules that are similar to the Position Limits. The idea here is prevent an investor (or group using same advisor) from disrupting the orderly trading of a company by suddenly exercising huge numbers of contracts.

Additional Comments:

The rule says that an investor may not exercise more than the appropriate number of contracts during a five consecutive business day period.

For example, suppose an investor exercised 2,000 calls on Friday (6-7-96), then 2,000 on Monday (6-10-96), then 1,000 on Tuesday (6-11-96), then 1,000 on Wednesday (6-12-96), then 1,500 on Thursday (6-13-96). How many calls may they exercise on Friday (6-14-96) if the limit is 7,500?

The answer is 2,000 since during the last four days only 5,500 had been exercised. Since the rule applies to each side of the market separately, they may also exercise 7,500 puts during any five days.

Related Terms:

Position Limits
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Covered Call
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The amount of trading activity associated with a given security during a period of time. Stock ...

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