Trading Halt

What Happens to your Options when the Underlying Stock Stops Trading?

Halt
Trading Halt. pixabay

Suppose that you own an option position in a stock that halts trading. This cessation of trading in the stock means that options must also stop trading. The halt usually lasts only long enough for the news to be released and for the stock specialist to be ready to handle the large quantity of buy and sell orders that accompany such a halt.

But the important question is: Do you know your rights/obligations/choices when you have an open option position on a stock that halts trading?

More importantly, do you know that if expiration arrives during an especially lengthy halt that no options are subject to exercise by exception (automatic exercise)? You must notify your broker to exercise in-the-money options or they will expire worthless. It's clearly best to sell the options to avoid a difficult decision, but they no longer trade.

Exercising a call option becomes a very difficult decision when the option is in the money when particularly bad news is announced. Sure, you know that the stock will open lower than where it closed, but most people have no idea whether their options will still be in the money. And that makes it very risky to exercise in-the-money call options.

The same situation holds for the owners of out-of-the-money put options. Will the stock decline by enough to move those options in the money? Dare you exercise and OTM put option? This is just as risky as exercising an ITM call option.

And don't forget that if you wrote covered calls, your ITM options may expire worthless and you will still own the stock. However, you cannot know whether this happens until expiration passes because assignment notices are not going to be available before that time. And if you sold puts that are currently OTM, you may still be at expiration.

 

For example, if the stock last trades at $37 when something unexpected (and bad enough to result in a trading halt) happens, it seems pretty obvious to allow the 35-strike calls to expire. But what about the 30s or the 25s? No one wants to exercise a call option at $30 only to discover that the stock is $22 when it finally opens (after the expiration date of your options). A similar decision is faced by the put owner. Sure it is probably right to exercise the 35-strike puts, but there is no certainty that doing so will work out well. And the 30-put is still quite far OTM. Just how bad is the news? It is not easy for the average trader to have enough information to make a sound decision.

Automatic Exercise (Exercise by Exception)

Here is the official definition from the OCC (Options Clearing Corporation).

“Exercise by exception” is an administrative procedure used by OCC to expedite the exercise of expiring options by Clearing Members. In this procedure options which are in-the-money by specified threshold amounts (currently one penny) are exercised unless the Clearing Member submits instructions not to exercise these options. “Exercise by exception” is a procedural convenience extended to OCC Clearing Members, which relieves them of the operational burden of entering individual exercise instructions for every option contract to be exercised. It is important to note “exercise by exception” is a procedure between OCC and its Clearing Members and is not intended to obviate the need for customers to communicate exercise instructions to their brokers."

Allowing ITM call options to expire worthless is the default choice. In other words, if you fail to tell your broker to exercise, they will not be exercised. To clarify: Absent instructions to exercise – no matter how deep ITM the options were prior to the trading halt – they will expire and become worthless, unless the broker is notified that you want to exercise. That is because the automatic exercise operation is suspended when a stock is halted and expiration arrives.