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Position Limits

Each stock is assigned a numerical limit based on its trading volume. The exam will give you the limit, i.e. 7,500 contracts. The idea is to prevent an investor (or group using the same advisor) from establishing a huge position in the stock by using blocks of options rather than the actual shares.

Additional Comments:

The Position Limit rule says that an investor may not hold an open position in more than the appropriate limit on each “side of the market,” meaning bullish or bearish. For example:

Suppose a stock has a position limit of 7,500 and a client has already purchased 6,000 calls. What may he now do? Well, they could buy no more than 1,500 additional calls because that would take them up to 7,500. However, they may also violate this rule by writing 1,500 puts since either position is considered bullish. As for the bearish side, they may also buy puts and/or write calls in any combination up to 7,500.

The bullish strategies are Buying Calls and Writing Puts, while the bearish strategies are Buying Puts and Writing Calls. (Opposite actions in the opposite options.)

Related Terms:

Exercise Limits
Rules that are similar to the Position Limits. The idea here is prevent an investor (or ...

Covered Call
A strategy that involves buying stock shares and selling calls. If the calls are assigned, the ...

Put-Call Ratio
A ratio of the trading volume of put options to call options. It is used to ...

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