Hello Mark,

I cannot find the answer to the following question. Is there a fixed amount of contracts/options a stock can have? I know companies have a fixed amount of shares that can trade but is this true for options? I would think there cannot be more contracts that total more than the number of shares a company has outstanding in the open market.

One more thing if I may ask, what's the purpose brokers enforcing exercising options when they are $0.01 in the money. It used to be a quarter, then five cents and now it's a penny. I think it makes it tougher on us traders. Is it about making more in commissions? If I sold a cover called that was in the money by 1 cent but why would they want it exercised? I would let it go with no problem but would they get stuck with the shares if they cannot match it to any of the option buyers if they decide to buy back their
contracts?

Thanks
JP.

Hello JP,

There is no limit to the number of option contracts. Anyone can create a new contract simply by writing (selling) one. There is no need to own a position in the underlying stock to sell a call or put option. Thus, the number of option contracts has no limit.

It's not the brokers who made the new (stupid, in my opinion) rule of automatically exercising options that are in the money by one cent or more. It's the OCC (Options Clearing Corporation and the options exchanges).

The 'excuse' for incorporating this rule change is that if the option has intrinsic value, why would anyone want to throw away money? If something is worth $1.00 or $2.00, why wouldn't the investor want to exercise? What they fail to take into consideration is:

• Most brokers charge an exercise fee, making it a losing proposition to exercise such options
• When it's a call option, the investor must pay interest to hold the stock - and that interest can easily be more than the measly buck or two that the option is in the money
• Many people do not fully understand how options work (okay, that's not the responsibility of the OCC, but there is no need to punish an under-informed investor) and, despite warnings from their broker, will not know enough to submit a 'do not exercise' instruction.
• Many new option traders have small accounts and will not have the ability to own long stock.  They will be forced to spend yet another commission to unload the stock when the market opens for trading.

I don't want to be cynical, but yes - to me it's just a plan to give the brokers more income and if that hurts the small investor, too bad.  I loathe this new rule.

In fact, I wrote about this topic in my new blog yesterday.  The heading is: "Warning about the exercise process".  Take a look: http://optionsforrookies.typepad.com/options_for_rookies/

One more important point: "If I sold a cover called that was in the money by 1 cent but why would they want it exercised?"  You never know who owns that option.  If it's an individual investor like you, that person would probably NOT want to exercise.  But if it's owned by a professional trader who was using that call option as a hedge against his large position, the chances are very high that he would always exercise.

Mark

--
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
website:  http://www.mdwoptions.com
blog: http://optionsforrookies.typepad.com/options_for_rookies/