There are now three styles of options:
- American style: Can be exercised any time after purchase
- European style: Can only be exercised on expiration day
- Paulson style: Can never be exercised.
Thanks to Adam at Daily Options Report for inventing this nomenclature.
As reported by Barron's, this morning my broker (Interactive Brokers) told it's customers that
they may no longer exercise put options or sell call options – on those 799 financial stocks – unless
they already own stock. This action prevents a customer from
- Exercising a put option to open a stock short position
- Being assigned an exercise notice on a call option that results in a short stock position
I don't see how this is possible. The put option contract (American) specifically gives its owner the right to exercise any time before the option expires. Apparently the Powers That Be have converted options of the 799 financial stocks (plus a few others are now included) from American style to Paulson style.
I could understand if the broker told customers who exercise a put option that they cannot hold a short stock position and would be forced to liquidate immediately after exercising. But preventing a put exercise is more madness.
Addendum (with thanks to George E). How can this problem be fixed? One idea is to convert these options into cash-settled European style options. Of course, that alters the value of the options (by canceling the early exercise provision of the contract, put options are worth a bit less) – but it solves the major problem because exercise does not result in a short stock position.