A trading halt on a stock occurs when a listing exchange determines there are circ*mstances that necessitate a stock to be halted. A halt may be brief or for an extended period of time, but no matter the length, the impact on investors could be significant, including option holders and writers.
Trading halts are not a common occurrence. However, when considering the vastness of the financial markets, it is important to understand the process and the factors that may cause a halt.
The decision is to halt a stock is typically made by the listing exchange. Brief halts may be driven by impending news, an order imbalance, a sudden movement in the underlying stock, or other factors. Longer-term halts may last for days, weeks or even longer, and are typically driven by material developments, for instance, a pending delisting or the potential bankruptcy of the underlying. Regardless of the reason, if a stock is halted, the options on the underlying stock will also be halted on the option exchanges on which it trades.
The impact of a trading halt is two-fold for any options on a halted underlying stock. First, the buyer (owner) of an option typically continues to retain control over their contract, namely the right to exercise the option, whereas the option seller (writer) remains obligated to fulfill the terms of the option, should they be assigned. However, if upon exercise and assignment of the option, the party obligated to deliver the underlying security does not already own the shares, it may be difficult to obtain the shares to deliver.
Second, long-term halts have a direct effect on the cornerstone of option prices - because there is no current, agreed upon underlying value on which to base the prices of the options. Since the Exercise by Exception (ex-by-ex) process, also known as the automatic exercise process, for options relies on the underlying stock price as its core input, without that value, OCC will typically stop automatic exercises in these cases. This, in turn, moves the onus to the option holder to make an independent determination of the value of the option deliverable in deciding to exercise, or not exercise, any expiring long positions.
If an option has been removed from ex-by-ex processing and the owner of an option determines there is value in exercising the option at or before expiration, they will need to provide exercise instructions to their brokerage firm before the firm's cut-off time for exercise instructions. Otherwise, unexercised options will expire with no value.
These events can become quite complicated. Option investors can find out more information about trading halt processing by viewing Information Memo #30049. Additional information that may help investors is also available, including on the OptionsEducation.org website, where the Options Exercise page and the Splits, Mergers, Spinoffs & Bankruptcies page could be especially useful.
FAQs
Regardless of the reason, if a stock is halted, the options on the underlying stock will also be halted on the option exchanges on which it trades. The impact of a trading halt is two-fold for any options on a halted underlying stock.
What happens to options if trading is halted? ›
When trading is halted, the related options are frozen. You still retain the right to exercise them though. This is because it's a binding contract with all rights and obligations implicitly laid out in the terms.
Are trading halts good or bad? ›
Generally speaking, the aim of these halts is to protect investors, but sometimes they could also be a precursor to some negative announcements from the company in question. Investors should therefore proceed cautiously before purchasing a stock after a trading suspension has ended.
Can you exercise options on a halted stock? ›
(C) Exercises of American-style, cash-settled index options shall not be prohibited during a trading halt that occurs at or after 4:00 p.m. Eastern Time.
Why do companies issue trading halts? ›
Trading halts can stem from multiple causes. Volatility and pending news are two of the most common reasons. Other causes include failure to document filings with the SEC, suspected fraud or market manipulation, and lack of funds to pay the clearinghouse. Short stock halts occur daily.
What happens to put options when the market crashes? ›
If the option is out of the money—the stock price is above the strike price—at expiration, the put option will expire worthless and 100% of the premium paid is lost. If the stock sees a sudden drop before expiration, the premium will likely increase in value and the put option could potentially be sold for a profit.
What happens to options if stock is delisted? ›
When a stock is delisted, options trading on that stock typically ceases. This means that options holders are no longer able to buy or sell their options on the open market. However, they still have the right to exercise their options if they choose to do so.
How long does a trading halt usually last? ›
A trading halt typically lasts less than an hour (but can be longer) and is called during the trading day to allow a company to "announce important news or where there is a significant order imbalance between buyers and sellers in a security."
What triggers a trading halt? ›
The most common reasons for a stock's trading being halted are as follows: Major corporate transactions (such as a merger or acquisition, restructuring, etc.) or news. Significant information (negative or positive) about the company's products or services.
What is the rule for trading halt? ›
Trading is halted when extraordinary market activity in the security is occurring; NASDAQ determines that such extraordinary market activity is likely to have a material effect on the market for that security; and 1) NASDAQ believes that such extraordinary market activity is caused by the misuse or malfunction of an ...
If your company is private and isn't likely to offer any tender offers or IPO soon, exercising your options is inherently risky—you're paying cash for shares that may never become liquid.
Why was GameStop trading halted? ›
GameStop (GME) shares were halted from trading multiple times due to volatility Monday morning after the meme stock soared with the online return of Keith Gill, who was a key driver of the stock's surge in late 2020 and early 2021.
Should you exercise stock options right away? ›
Exercising Early
The first benefit of exercising early is that you will likely have zero (or very little) tax liability at the time of exercise. The second is that you will get a head start on the clock on long-term capital gains for options that you haven't even vested.
What happens to options when a company is halted? ›
Regardless of the reason, if a stock is halted, the options on the underlying stock will also be halted on the option exchanges on which it trades.
Is a trading halt bad news? ›
Trading halts are commonly requested when a company is about to release important news. This could be news about a merger or acquisition, regulatory development, or any unusual information that may positively or negatively impact the share price.
Can you sell during a trading halt? ›
During a trading halt, one or more securities exchanges will prevent all trades of the specified security. These halts typically last less than an hour but can be longer.
When should you avoid options trading? ›
7 mistakes to avoid when trading options
- Not having a trading strategy.
- Lack of diversification.
- Lack of discipline.
- Using margin to buy options.
- Focusing on illiquid options.
- Failing to understand technical indicators.
- Not accounting for volatility.
As an option approaches expiry, the contract holder must decide whether to sell, exercise, or let it expire. Options can be in or out of the money. When an option is in the money, it can be exercised or sold. An out-of-the-money option or an at-the-money option will expire worthless.
