Position Limits and Exercise Limits
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.
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 trading volume and float of the underlying stock:
| Tier | Criteria | Position Limit |
|---|---|---|
| Tier 1 | Trading volume of 40M shares (6-month) or 30M shares + 120M float | 250,000 contracts |
| Tier 2 | Trading volume of 20M shares (6-month) or 15M shares + 40M float | 200,000 contracts |
| Tier 3 | Does not meet Tier 1 or Tier 2 criteria | 75,000 contracts |
- 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
Exam Tip: Gotchas
- 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.
Exercise Limits
- Exercise limits cap the maximum number of contracts that can be exercised within five consecutive business days
- Exercise limits equal position limits for the same underlying
- Purpose: Prevent any single investor from exercising so many contracts that it disrupts the market for the underlying security
Exam Tip: Gotchas
- Exercise limits always equal position limits for the same underlying security. The only difference is that exercise limits are measured over a rolling 5-business-day window.