What is the exercise limit?
Exercise limit is a type of maximum number of contracts that a single investor can exercise in a given period of time. The idea of this type of restriction is to minimize the opportunity for an investor that performs an unusually high number of options for the same basic asset in a short period of time, which could have serious consequences on the market. The period of time, which applies to the limit of the exercise, is usually five business days, with certain exceptions to the rule in the last ten -day period before they get into maturity.
One of the best examples of exercise limit is found at the Chicago Board Options Exchange (CBE). The stock exchange has specific limits placed on the drowning and derivatives of options, and the limit is not more than 5,000 contracts associated with the underlying asset within five consecutive business days. This means that if an individual or corporate investor has more Th5 000 contracts associated with a specific option, some of these contracts cannot be applieduntil five business days and some of the recent contracts have not been concluded for at least five days.
The advantage of determining a certain limit of exercise on the laundry of options about the same basic asset is that there is less chance of creating instability in this market or replacement. The limit effectively prevents excessive transactions that could allow a single investor or group of investors to gain control of the market at the expense of other investors. This, in turn, means that market movements are less likely to have an unusually strong impact on the economy in general and create problems for people who trade in this market.
While the limit of the exercise usually focuses on allowing only a certain number of options with a common option that is based on an asset to be performed in a defined period of time, most of the exchanges allow some exceptions. The limit can be suspended to timesIf, unlike business regulations imposed by the government, and if there are persuasive reasons, they think that this activity would help reverse some kind of adverse effects in this market. In addition, the stock exchange can also give up the limit of contracts that are going to mature or expire, usually on the last ten trade days before the expiration occurs.