PUDA Coal Teaches Option Traders a New Lesson

"Expect the unexpected" applies equally to trading options as well as to life in general.

Trading in both Puda Coal, Inc. (PUDA) common stock and listed options was halted Monday. In addition – and here is lesson #1 – The Options Clearing Corporation removed these options "from automatic exercise thresholds in expirationn processing." This means that option owners who want to exercise must specifically instruct their broker to exercise. If an option owner does not instruct the broker to exercise, then the option will expire unexercised, even if it is in the money (whatever "in the money" is will only be determined when the stock reopens for trading).

Lesson #2 is that, with stock trading halted, stock cannot be borrowed. Therefore, it might be impossible to deliver stock to settle the exercise of a long put. Remember, the exerciser of a put must deliver stock in return for cash equal to the option’s strike price. As a result, some brokrage firms might not allow the exercise of a long put unless the stock is owned.

To learn more, here is the link to the memo published by The Options Clearing Corporation (OCC) on April 12.

http://www.optionsclearing.com/components/docs/market-data/infomemos/2011/apr/28687.pdf

If the link does not work, the document number at OCC is "28687