Definitions for Option Transactions - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions
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Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext)
Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent
TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous

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Section 2.1 in a Nutshell
Use at your own risk, campers!

2.1. Certain Definitions and Provisions Relating to Option Transactions. The following terms apply to Option Transactions:

2.1(a)Commencement Date” means, for an American Option Transaction, the date so specified in the Confirmation (or the next following Scheduled Trading Day, if it is not a Scheduled Trading Day) or if no such date is specified, the Trade Date.
2.1(b)Number of Options” must be specified in the Confirmation.
2.1(c)Option Entitlement” means the number of Shares, or Baskets, per Option specified in the Confirmation or, if none is specified, one Share or Basket per Option.
2.1(d)Option” means each unit into which an Option Transaction is divided for purposes of exercise, valuation or settlement.
2.1(e)Strike Price” means:
(i) for an Index Option Transaction, the level of the Index specified in the Confirmation;
(ii) for a Share Option Transaction, the price per Share specified in the Confirmation;
(iii) for an Index Basket Option Transaction, the amount per Basket specified in the Confirmation; and
(iv) for a Share Basket Option Transaction, the amount per Basket specified in the Confirmation.

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Full text of Section 2.1

Section 2.1. Certain Definitions and Provisions Relating to Option Transactions. When used in relation to an Option Transaction, the following terms have the indicated meanings:

2.1(a) Commencement Date. “Commencement Date” means, in respect of an American Option Transaction, the date specified as such in the related Confirmation or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day. If no such date is specified, the Commencement Date shall be the Trade Date.
2.1(b) Number of Options. “Number of Options” means the number specified as such in the related Confirmation, being the number of Options comprised in the relevant Option Transaction.
2.1(c) Option Entitlement. “Option Entitlement” means, in respect of a Share Option Transaction, the number of Shares per Option specified as such in the related Confirmation and, in respect of a Share Basket Option Transaction, the number of Baskets per Option specified as such in the related Confirmation. In the event that no Option Entitlement is specified in the related Confirmation, the Option Entitlement in respect of any Share Option Transaction shall be one Share per Option, and in respect of any Share Basket Option Transaction shall be one Basket per Option.
2.1(d) Option. “Option” means, in respect of an Option Transaction, each unit into which the Option Transaction is divided for purposes of exercise, valuation or settlement.
2.1(e) Strike Price. “Strike Price” means:
(i) in respect of an Index Option Transaction, the level of the relevant Index specified or otherwise determined as provided in the related Confirmation;
(ii) in respect of a Share Option Transaction, the price per Share specified or otherwise determined as provided in the related Confirmation;
(iii) in respect of an Index Basket Option Transaction, the amount per Basket specified or otherwise determined as provided in the related Confirmation; and
(iv) in respect of a Share Basket Option Transaction, the amount per Basket specified or otherwise determined as provided in the related Confirmation.

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Content and comparisons

Not much to get excited about here — some for prose stylists to get disappointed about, but who cares about them, eh?
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Summary

Commencement Date is relevant only for American Options — those which are exercisable at any time during their term,[1] of course, so you do need to know when the term starts — and indeed only appears once in the 2002 ISDA Equity Derivatives Definitions outside the actual definition in Section 2.1(a). I know what you are thinking, about the perfectly good trees that might be with us today.

The rest of these definitions are mechanical enough almost to go without saying — but that is not how ISDA’s crack drafting squad™ rolls, is it?
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See also

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References


  1. To be contrasted with European Options, which are only exercisable on one day — usually expiry.