Options on a Halted Stock: Can You Still Exercise?

Your options stop trading too. When a stock exchange halts trading in a stock, the options exchanges also halt trading in its options, so calls and puts on that name can’t be bought or sold until the halt lifts. Exercise is a different matter. According to the Options Industry Council, the lack of trading typically does not affect the ability of call or put holders to exercise, with one exception worth knowing: a broker may restrict put holders who don’t own the stock. And if the halt runs into expiration, you should give your broker explicit instructions.

What follows covers how each of those plays out, with the arithmetic for a call holder and the risks for anyone who wrote options on the stock.

Trading freezes, exercise rights don’t

Cboe’s rules say options trading generally halts when the underlying stock has a regulatory halt in its primary market. Check the code. It tells you what kind of stop you’re in, and trading halt codes explains how to read it. A news halt and a filing halt look the same on an option chain. Both show frozen quotes.

Exercise is handled away from the order book. You instruct your broker, the broker passes the instruction on to OCC, and none of that depends on a buyer and a seller meeting on an exchange, which is why a halt in trading typically leaves exercise alone. American-style equity options can be exercised on any day the market is open before expiration, up to your broker’s cut-off time on the last trading day. Brokers set those cut-offs. Find yours now.

Exercise has its own consequences. A call exercised buys 100 shares per contract at the strike. A put exercised sells 100 shares per contract at the strike. Either way, shares change hands. Nobody can trade them yet.

Puts on shares you don’t own

Here the Options Industry Council adds its caveat. A brokerage firm may restrict exercise for put holders who don’t own the underlying stock, for example when the stock is hard to borrow, and there may be locate requirements before the firm will let the exercise go through.

The reason is mechanical. Exercising a put without the shares sells stock you don’t have, which leaves you short at the strike, and a short sale needs shares that can be borrowed. On a hard to borrow stock, they may not exist.

If you own the shares, the picture is friendlier. A put on stock you hold lets you sell 100 shares per contract at the strike through exercise, which makes it one of the few ways to get out of a position while the stock itself is frozen, provided you get the instruction in before your broker’s cut-off.

When the halt runs into expiration

Expiration is where a halt causes real trouble. Normally OCC runs a process called exercise by exception, often wrongly called automatic exercise, under which it exercises expiring equity options that are in the money by $0.01 or more per contract unless it’s told otherwise, judging in the money from the underlying’s closing price. That’s the default.

Two details matter. Exercise by exception is a procedure between OCC and its clearing members. It doesn’t stand in for your own instructions. OCC wants customers to say explicitly whether to exercise or not. The second detail is specific to halts. Depending on when the halt occurred, options may be removed from exercise-by-exception processing altogether.

So the default you may be counting on might not run. The Options Industry Council says option holders are encouraged, and may be required, to enter explicit instructions with their firm to exercise any expiring option on a halted stock. If you say nothing, you’re relying on a process that may not apply to your contract that day, and the outcome could be an exercise you didn’t plan for or a valuable option left to expire.

What counts as the closing price of a stock that didn’t trade at the close? Your broker can answer that. Ask before the cut-off.

A call holder’s arithmetic

Say you hold 3 calls with a 40.00 strike. The stock last traded at 46.00. Then a news halt hit, and it’s still on when expiration day arrives.

The 46.00 is the last price anyone paid. It says nothing reliable about the reopen. Exercise at the strike and you lock in the purchase price while the value of what you bought stays unknown, so you’re making a decision worth 12,000 on information that may already be out of date.

Then there’s the money. Without 12,000 in cash, exercising in a margin account means borrowing against shares you can’t sell until the halt lifts. Your broker decides how it values a halted position, and the way it applies its intraday margin requirements to a fresh, frozen 300-share position is worth asking about before you send the instruction. Can’t fund it? Tell the broker that as well.

If you wrote the options

Short option positions are the uncomfortable side of this. You can’t buy them back while the options are halted. Holders can generally still exercise. So assignment can land on you during the freeze.

A short put that gets assigned obliges you to buy 100 shares per contract at the strike, in a stock you can’t sell until it reopens. A short call assigned means delivering shares, and if the call was uncovered, that leaves you short a halted stock with no way to buy it back yet. Neither outcome waits for trading to resume. The capital or the shares are committed the moment the assignment arrives, and the size of the gain or loss is decided later, by an auction price you had no hand in setting.

Watch for assignment notices.

What to do while the stock is frozen

• Find the halt code on the listing exchange’s halt list.
• Ask your broker for its exercise cut-off.
• Ask how it will treat expiring contracts on a halted stock, and whether it requires explicit instructions for them.
• Work out the cash for any exercise: strike x 100 x contracts.
• If you hold puts without the shares, ask about borrow and locates.
• Check for assignment if you wrote options.

The general mechanics of a halt, from queued orders to the reopening auction, are in what happens when a stock you own is halted. If the code is H10, the SEC has suspended trading, and the wait can be much longer, which is covered in what happens after an SEC trading suspension.