Quick Answer
Position limits cap the maximum contracts an investor can hold on the same side of the market for one underlying security; exercise limits cap contracts exercised within five business days and generally equal position limits. Both aggregate long calls with short puts on the bullish side, and long puts with short calls on the bearish side.
Now that you understand how open interest tracks outstanding positions, the next logical question is: how many contracts can one investor hold? Exchanges impose caps (position limits and exercise limits) to prevent any single investor from accumulating enough contracts to manipulate the underlying market.
What Are Position Limits?
Position limits cap the maximum number of contracts an investor (or group of related investors acting in concert) can hold on the same side of the market for a single underlying security.
Same Side of the Market
This is a critical concept. Positions on the same side have the same directional outlook:
| Side | Positions | Market Outlook |
|---|---|---|
| Bullish side | Long calls + Short puts | Expects stock to rise |
| Bearish side | Long puts + Short calls | Expects stock to fall |
To determine whether an investor exceeds a position limit, add together all positions on the same side, not all four position types combined.
Position Limit Tiers
Position limits vary based on the 6-month trading volume and shares outstanding of the underlying stock. There are five standard tiers, from a base of 25,000 contracts up to 250,000:
| 6-Month Trading Volume | Shares-Outstanding Alternative | Position Limit |
|---|---|---|
| At least 100M shares | or 75M traded + 300M outstanding | 250,000 contracts |
| At least 80M shares | or 60M traded + 240M outstanding | 200,000 contracts |
| At least 40M shares | or 30M traded + 120M outstanding | 75,000 contracts |
| At least 20M shares | or 15M traded + 40M outstanding | 50,000 contracts |
| Does not meet any higher threshold | base (default) tier | 25,000 contracts |
- The base limit is 25,000 contracts for the least actively traded optionable securities; a stock qualifies for a higher tier only by meeting that tier's volume or volume-plus-shares-outstanding threshold
- Broad-based index options (e.g., S&P 500) may have no position limits or significantly higher limits
- Narrow-based (industry) index options have their own limits set by the exchange, generally 18,000, 24,000, or 31,500 contracts depending on how concentrated the index is in its largest components
- Interest rate options are capped separately: 5,000 contracts for a short-term Treasury measure and 25,000 contracts for a long-term Treasury measure
Exam Tip: Gotchas
- The base position limit is 25,000 contracts, not the top tier. A stock reaches the 250,000 limit only with very heavy trading volume (at least 100M shares over six months).
- Position limits aggregate long calls with short puts on the bullish side, and long puts with short calls on the bearish side. The exam may present multiple positions and ask whether the limit has been exceeded. Add bullish positions together and bearish positions together, not all four position types.
- Broad-based index options may have no position limits. Narrow-based index options still have limits set by the exchange.
What Are Exercise Limits?
- Exercise limits cap the maximum number of contracts that can be exercised within five consecutive business days
- Exercise limits generally equal position limits for the same underlying (index-option exercise limits key off the position limit for the nearest-expiration contract, and some products carry their own exemptions)
- Purpose: Prevent any single investor from exercising so many contracts that it disrupts the market for the underlying security
Exam Tip: Gotchas
- Exercise limits generally equal position limits for the same underlying security, measured over a rolling 5-business-day window instead of held at a point in time.
What Should You Check on Exam Day?
- Aggregate positions by side of the market (bullish: long calls + short puts; bearish: long puts + short calls), never all four types together
- The base position limit is 25,000 contracts; only heavy volume reaches the 250,000-contract tier
- Exercise limits generally equal position limits and are measured over five consecutive business days
- Broad-based index options may have no position limit; narrow-based index options still do