October, 1996 Supplement to Characteristics and Risks of Standardized Options

To accommodate the introduction of flexibly structured stock options (and the possible future introduction of other European-style stock options) and to reflect the current rules of the options markets on which flexibly structured stock options are traded, the February 1994 edition of the booklet entitled Characteristics and Risks of Standardized Options (the "options booklet") is amended as follows:

1. The second full paragraph after the example on page 21 of the options booklet is amended to read: When an underlying security is converted into a right to receive a fixed amount of cash, options on that security will generally be adjusted to require the delivery upon exercise of a fixed amount of cash, and trading in the options will ordinarily cease when the conversion becomes effective. As a result, after such an adjustment is made all options on that security that are not in the money will become worthless and all that are in the money will have no time value. If the option is European-style (as may be the case for a flexibly structured stock option designated as a European-style option), the expiration date of the option will ordinarily be accelerated to fall on or shortly after the date on which the conversion of the underlying security to a right to receive cash occurs. Holders of an in the money option whose expiration date is accelerated must be prepared to exercise that option prior to the accelerated exercise cut off time in order to prevent the option from expiring unexercised. Writers of European-style options whose expiration date is subject to being accelerated bear the risk that, in the event of such an acceleration, they may be assigned an exercise notice and be required to perform their obligations as writers prior to the original expiration date. When the expiration date of a European- style option is accelerated, no adjustment will be made to reflect the accelerated expiration date. There is no assurance that the exercise settlement date for an accelerated option will coincide with the date that the cash payment to the holders of the underlying security becomes available from the issuer of the underlying security. Covered writers of an accelerated option may therefore be required to pay the cash amount in respect of the option before they receive the cash payment on the underlying security.
2. The following paragraph is added to the description of flexibly structured options on page 46 of the options booklet, following the second paragraph under the caption "Special Features of Flexibly Structured Options": The parties to an opening transaction in a flexibly structured call option on an individual stock may fix the exercise price of the option only at a price that would qualify under the rules of the options market where the opening transaction occurs as the exercise price of a series of non-flexibly structured options on the same stock, and that is evenly divisible by the applicable minimal exercise price interval on that market. For example, for a flexibly structured call option on a stock for which the minimum exercise price interval is $5, the exercise price may be designated as $25, $30, $35, $40, etc. This restriction does not apply to the exercise prices of flexibly structured stock put options. Investors considering strategies involving combinations of flexibly structured put and call stock options should therefore be aware of this difference between the two types of options.
3. The third and fourth sentences of the paragraph under "Exercises and Settlements" on page 47 of the options booklet are amended to read: However, unlike most other options, flexibly structured index options that are in the money on the expiration date may be exercised automatically. In the future it may be provided that flexibly structured index options will be exercised automatically only if they are in the money by a specified amount.

[Back to 1995 Supplement ]