Customers who invest in options are used to a number of things being a certain way at BinckBank. After the transition to Saxo Bank, much will remain the same, but there are some key differences.
If you are an options investor, read this article carefully to avoid surprises.
A wider range of options
You will find an increase in the number of options available because Saxo Bank has a wider range than BinckBank. For example, there are more US and German stocks, and options on stocks listed in Hong Kong or Australia will also become available. Pay attention to the new trading times, especially around expiration.
Please note that if you need support regarding your end-customer's open positions or orders on foreign exchanges, the opening hours of the Saxo service desk differ from the opening hours of some foreign option exchanges and support is therefore not always available.
The option to specify markets orders and limit orders remains. The duration of the option orders has been extended to:
- Day orders (best or limit) for Euronext and the US
- Specific date
- Until cancellation*
*The order type until cancellation was historically limited to 28 days. After the transition to Saxo Bank, this order will continue until the order is canceled (or executed).
At BinckBank, it is possible to place combination orders on Euronext. These are orders that consist of two ‘legs’ that allow you to set up spreads, straddles and strangles in one combined order. These combination orders were not available for the US options.
At Saxo Bank, you can place combination orders on both Euronext and the US stock exchanges. In addition, it is possible to place combination orders consisting of more than two 'legs', which allows for the option combinations Butterfly and Iron Condor (these consist of three or four legs).
The exchange uses a procedure that determines randomly (“at random”) who will be “assigned”. If a customer of Saxo Bank is assigned, Saxo Bank also internally uses a random procedure that determines which customer will ultimately be designated.
Assignment of uncovered short call options
Your end-customers may be assigned to deliver on a naked short call. You will then see in your end-customer's portfolio overview that your end-customer is short on the shares to be delivered. A buy order is then immediately generated that will cancel this short share position. This order will be executed at the opening of the exchange, at the usual transaction rates.
Exercising (exercising) options
Of course, you can exercise your end-customer's right to exercise with a long option position. You can do this from the portfolio overview.
This is no different at Saxo, but there is one important exception. You cannot exercise on the day of expiration. Expiration normally falls on Friday, excluding public holidays. So keep this in mind if you want to use your end-customer's right to buy (long call option) or sell (long put option).
If you do find yourself in the situation that you want to exercise on the day of expiration, the solution is simple. You sell the long call(s) and purchase the relevant shares yourself in the market. In the case of a long put in combination with long stocks, you are selling both in the market. In both cases, this action has the same result as exercising the option.
As explained above, you can exercise your end-customer's options at Saxo from the portfolio overview, except on the last trading day. There is another important difference at Saxo regarding the expiration date: at Saxo Bank, options with intrinsic value (even if it is only EUR 0.01) are automatically exercised.
Binck applied the rule that all options that were more than 2% In The Money (ITM) on the expiration date were exercised by Binck and that a closing transaction was made on Monday when the underlying shares open on the market. In practice, this meant that Binck kept the shares in its own portfolio during the weekend. The result of this transaction – if positive – was credited to the customer's account after the deduction of 25% of the proceeds as a risk premium (with a ceiling).
Please note: this 2% rule no longer exists!
Again, all options that have intrinsic value are automatically exercised at the end of the expiration day. This means that as an investor you have to pay close attention to the expiration. For example, if your end-customer owns 5 ITM ABC calls and you let them expire, this will mean that your end-customer will have 500 ABC shares in their portfolio after expiration. Of course, your end-customer must have sufficient balance in their account for this. And be aware that the risk profile of 500 ABC shares looks different than owning 5 calls ABC.
To prevent investors from being negatively impacted by the above rule, the following procedure applies: with long option positions, margin is requested two hours before the close of trading on the expiration date. The margin will rise to the full exercise price before the close of the trading day. If your end-customer does not have sufficient balance in their account, Saxo Bank will close your end-customer's open and expiring option positions that day. If your end-customer has sufficient balance in their account, they will automatically receive the shares.
As a result of the automatic exercise, your end-customer may end up holding a stock position after expiration. If you don’t take action, your end-customer’s long call option on the Thursday before expiration will become a stock position on Friday after the close of trading.
If this is your intention, then of course there is nothing wrong with that outcome, so long as you remember that an equity position carries different risks than a long option position.
If this is not your intention, you must take action by selling the options that have intrinsic value on the last trading day and thus avoiding the automatic exercise.
On Euronext Amsterdam’s expiry day, you have 5 ABC calls that will expire. Your 5 calls have a strike price of 10 while the share is trading at EUR 11. You will receive a message in the morning notifying you of these positions and the fact that margin will be requested two hours before the actual expiration time.
These positions – as a result of the automatic exercise at ITM – would cost you EUR 5,000 (the automatic exercise results in 500 shares being purchased for EUR 10). To ensure that you can actually meet this obligation, margin is requested for the long option positions at 3:30pm (because the option trade on Euronext closes at 5:30pm). You will receive a notification. The margin will rise to 100% of the strike price in an hour and a half. In this case, that would be EUR 5,000.
On the morning of expiry day you will receive a message regarding your stock options expiring that day.
On the afternoon of the expiry day, you receive a notice that starts to calculate margin (for options on Euronext, this would be at 3:30pm).
If you hold combination orders such as long spreads, you will have to settle the margin requirement on expiration. Where the margin requirement for a long 100 – 110 call spread (the 100 call purchased, the 110 call short with the same or shorter term) until the expiration day is EUR 0, this combination can require margin on the expiration day. For example, if the share is trading at EUR 104 two hours before expiration, the margin due for the long 100 call will rise to 100% of the strike price in 1.5 hours. The short 110 call has no margin dampening effect because the chance that it could still become In The Money is very small.
In other words: where combinations up to the expiry day can have a limited margin impact, there is a good chance that a combination on the expiry day itself (starting two hours before the end of the trading day) will be technically assessed as a separate position.
The biggest change to note here is that Saxo Bank also requires margin for long positions.
Automatic exercise long puts
Automatic exercise applies not only to calls but also to puts. Consider the scenario that you have bought shares and also puts to protect those shares. As a result of the automatic exercise of the long put, your end-customer’s shareholding will decrease by 100 units per put purchased.
However, it is also possible that your end-customer holds the put long but not the underlying stock. Then the automatic exercise results in a short position of the shares. This short position is not allowed at Saxo and will automatically generate a buy order for the number of shares you are short. This buy order will – normally – be executed at the best opening price on the next trading day (usually Monday).
Margin will also be requested for the long put position if your end-customer does not own the shares. Two hours before the expiration, our risk system starts to reserve money, builds up gradually and after 1.5 hours it arrives at 100% of the value. If your end-customer has insufficient spending power for the margin, the option position will be closed.
Your end-customer’s experience as an options investor will mostly stay the same as it is with BinckBank. However, there are a number of differences. The most important one is not being able to exercise on expiration day. Another important difference is the fact that on expiration day your end-customer has to keep margin for long options from two hours before the close (and therefore the expiration), which increases to 100% of the strike price in one and a half hours. And above all, keep in mind that purchased options with intrinsic value are automatically exercised on the day of expiration.