How often would options contracts be exercised?

Not very often. Options holders may only obtain the option's intrinsic value as their profits if they choose to exercise the option contracts. It is usually more profitable to sell the contracts in the market. Therefore only a small percentage of options contracts will be exercised.

Why would one choose to exercise stock options early?

It is usually unwise to exercise an option early as the time value of the option will be sacrificed. When an option is deep in-the-money, however, only a very small amount of time value will be left. Investors may therefore wish to exercise the option early.

Another reason for early exercise is when investors want to receive the dividend entitled to the underlying stock. In this case, the investor will exercise his call option before the ex-dividend date

Would I lose my profits if I’ve forgotten to close out or exercise my in-the-money option position upon expiration?

Not necessarily. Currently, open options contracts that are 1.5% or more in-the-money upon expiration will be automatically exercised if there are no prior overriding instructions from the broker. Investors are therefore advised to understand properly the Options Trading Exchange Participants policy and procedures on exercise of options contracts to ensure that their positions are properly handled.

How are stock options exercised and settled?

Stock options traded on SEHK are American style. Option writers therefore need to be prepared for assignment at any time, including on the same day the option is written. An option position which is exercised or assigned will require the parties to deliver or pay for the underlying stock within the required stock settlement period (the second business day after exercise).

At HKEX, the exercise of stock options results in the physical delivery of stock. This is in contrast to other types of options exercise, which result in cash settlement.

In some situations, most stock option positions may either be closed out before expiry or expire unexercised. At other times, exercising an option may be a sensible course for option holders. Option holders and writers therefore need to be sure they are familiar with the process.

A stock option holder must instruct his or her broker to exercise the option if he or she wants it exercised. The brokerage firm has a deadline to meet every day after which SEOCH will not accept exercise instructions so the broker is likely to impose an earlier deadline on clients. Although SEOCH has a facility whereby certain deep in-the money options are automatically exercised upon expiry, brokers are able to over-ride this feature. It is therefore important for investors to inform their brokers if they wish to exercise.

When an option is exercised, SEOCH selects, or assigns, on a random basis, the short open position against which it is exercised. If the accounts of an Exchange Participant’s clients are assigned, the Exchange Participant must in turn assign, on a random basis, a short open position of the client. The designated client is then required to deliver (in the case of a call option writer) or buy the underlying stock (in the case of a put option writer). Stock transactions resulting from the exercise of options are cleared under the Continuous Net Settlement System of Hong Kong Securities Clearing Company Limited (HKSCC) which is a wholly-owned subsidiary of HKEX.

Remarks: For any discrepancies between this FAQ and the SEOCH and HKSCC Rules & Operational Procedures (“Clearing House Rules”), the relevant Clearing House Rules shall prevail.

Who is responsible for the clearing of stock options?

All stock option contracts traded on SEHK are cleared through SEOCH which is a wholly owned subsidiary of HKEX. By novation, SEOCH acts as a central counterparty to its Participants in relation to each option contract traded on SEHK and manages counterparty risk by, amongst other things, requiring margin funds from its Participants.

SEOCH's role as central counterparty only extends to its Participants. It does not extend to its Participants’ clients or other counterparties. If an Options Trading Exchange Participant or Options Broker Exchange Participant defaults on any of its obligations to its clients, the client’s only recourse is to the Options Trading Exchange Participant or Options Broker Exchange Participant itself. Not all Options Trading Exchange Participants are Participants of SEOCH. Only an Options Trading Exchange Participant which meets certain financial and operating requirements can become a SEOCH Participant.

How stock options is affected if the underlying stock is suspended for trading?

The stock options will be suspended for trading as well. On option expiry day, the closing price of the underlying stock quoted on the Exchange will be used as options settlement price if the stock is still suspended for trading. Options holders can still exercise their options.

Even if the underlying stock is being suspended for trading, the stock settlement still follows the normal settlement cycle, i.e. a broker who has exercised long put options contracts or has been assigned short call options contracts is required to settle its stock delivery obligation through CCASS pursuant to the CCASS Rules on the second settlement day immediately following the day on which the stock options contracts are exercised.

Remarks: For any discrepancies between this FAQ and the SEOCH and HKSCC Rules & Operational Procedures (“Clearing House Rules”), the relevant Clearing House Rules shall prevail.