Aggregate Exercise Price
What Is an Aggregate Exercise Price?
An aggregate exercise price is the total value of some underlying asset if one somehow managed to exercise all of their existing long options contracts on that asset. Put in an unexpected way, it is the net amount of money expected to purchase the underlying while practicing a long call option, or the capital required when assigned on a short put position.
This amount is determined by the number of contracts held at each strike price, and what each contract addresses in terms of underlying units.
Understanding Aggregate Exercise Price
The aggregate exercise price is, in effect, the total exercise value of a portfolio (book) of options positions. You can work out the aggregate exercise price by taking the strike price of the option and duplicating it by its contract size. On account of a bond option, the exercise price is duplicated by the face value of the underlying bond. The premium (price) paid to procure the option isn't figured in with the aggregate exercise price.
The purpose of computing the aggregate exercise price is to decide how much money the purchaser of the underlying asset must have to exercise the transaction. This is particularly relevant at expiration, when options will automatically be exercised and assigned in light of their moneyness.
Model for Equity Options
For an equity option, the aggregate exercise price is the contract size, times the number of contracts, times the exercise (strike) price. The contract size for practically totally listed equity options is 100 shares.
For company ABC, each contract is consequently equivalent to 100 shares of ABC stock. Expect a trader is long 5 call option contracts with a strike price of $40.00 and 3 with a strike of $35. The aggregate exercise price would be:
- (100 shares/contract * 5 contracts * $40.00 strike) + (100 * 3 * 35)
- = $20,000 + $10,500
- = $30,500
To exercise this call option, the holder would require $35,000 to take delivery of 800 total shares of company ABC stock.
Model for Bond Options
There isn't a lot of difference between the calculation of a bond option and a stock option. Each will trade in determined units so the value of the exercised option is calculated much the same way to stock options.
For a bond option, the aggregate exercise price is the bond face value, times the number of contracts, times the exercise (strike) price.
For bond XYZ, each contract typically covers one bond which has a face value of par, or 100% and the options strike price is likewise quoted in the percentage of par. For most bonds, this converts into $1000 of value. In this manner, a call option on a 5-bond part with a strike price of 90, the aggregate exercise price would be:
- 1 face value * 5 bonds for each contract * (90% of $1000)
- 1 * 5 * 900 = $4,500
To exercise this call option, the holder would require $4,500 to pay the seller to take delivery of 5 bonds of issuer XYZ.
Keep as a main priority that call options profit when the underlying bond moves higher in price. Alternately, this means they likewise profit when the important interest rate moves lower since bond prices and interest rates generally move in inverse headings.
Features
- An aggregate exercise price is the net amount of money expected to exercise throughout the entire existing call positions or potentially be assigned on short put positions.
- It is effectively the combined exercise price of every option's strike price duplicated by its contract size.
- Realizing one's aggregate exercise price will guarantee that there are an adequate number of liquid funds close by in the event of exercise at assignment, which is particularly applicable at options' expiration.
