A large options position can give an investor effective access to a very large amount of stock. For example, suppose an investor takes this position:
1,000,000 long CART $30 calls
Each options contract typically covers 100 shares. So 1,000,000 long calls give the right to buy 100,000,000 Instacart (ticker: CART) shares at $30 per share, for a total purchase price of $3 billion. If the investor exercised every call, they would own roughly 36% of CART’s outstanding shares (there are approximately 277 million shares outstanding at the time of this writing).
To prevent investors from building very large positions quickly, the Options Clearing Corporation (OCC) and FINRA limit the number of contracts a single party (or a group acting together) can control. This helps prevent a large investor from using options to gain a significant position “overnight.”
Separately, SEC-enforced regulations require public disclosure when an investor acquires 5% or more of an issuer’s publicly traded common stock.
Every options class has its own position limit. Many large-cap stocks have position limits of 250,000 contracts. This means an investor can’t hold more than 250,000 contracts on the same side of the market.
An option position is on the same side of the market when the positions reflect the same market view:
Only contracts on the same side are combined for the limit.
Let’s take a look at a practice question:
ABC stock maintains an options position limit of 100,000 contracts. Which of the following portfolios violate the position limit rule?
A) 50,000 long calls and 55,000 short calls
B) 50,000 long calls and 55,000 long puts
C) 50,000 long calls and 55,000 short puts
D) 50,000 long calls and 45,000 short puts
Answer = C) 50,000 long calls and 55,000 short puts
Long calls and short puts are both bullish, and the combined 105,000 contracts exceed the 100,000 contract limit.
Answer choices A and B exceed 100,000 total contracts, but each combines one bullish position with one bearish position. Because they are on opposite sides of the market, the contract counts are not combined for position-limit purposes. Therefore, A and B do not violate position limits.
Answer choice D contains two bullish option types, so the contracts are combined. However, the total is 95,000, which is below the 100,000 limit. Therefore, position limits are not violated.
Exemptions from position limit rules are provided to investors using options to hedging or covered positions. FINRA Rule 2360 specifically identifies the following strategies as exempt:
To be clear, options contracts used as part of a hedging or covered strategy do not count when determining whether position limits have been violated.
The OCC maintains the Large Options Position Reporting (LOPR) system to track large options positions across the market. This allows regulators to monitor positions even when an investor uses multiple accounts at different firms.
Position limits apply across all accounts an investor controls. Without LOPR, an investor could spread positions across multiple broker-dealers, stay under the limit at each firm, and still exceed the limit overall.
For example, suppose ABC stock has a position limit of 100,000 contracts. An investor could hold:
Each firm would see only 80,000 contracts, but the investor’s total position would be 240,000 contracts across the three firms, which violates the limit. LOPR gives regulators the data needed to identify this kind of situation.
FINRA Rule 2360 requires member firms to report customer (individuals and groups acting in concert) option positions to LOPR when at least 200 contracts on the same side of the market are acquired. Batch* LOPR reports must be submitted by 9:00 p.m. CT the business day after a reportable transaction occurs. For example, suppose a customer makes an opening purchase of 500 call option contracts on a Monday. The customer’s member firm must report the position to LOPR by Tuesday at 9:00 p.m. CT.
*Batch reports are large data files involving all customers with reportable positions.
Member firms must report any changes to positions as long as a customer (or group acting in customer) maintains 200 or more contracts. If the customer’s position falls below 200 contracts, one final report must be made to LOPR, and then no further reports are required (unless the position reaches 200 contracts again).
The data received via LOPR is disseminated to options exchanges (e.g., the Chicago Board Options Exchange) and self-regulatory organizations (e.g., FINRA) to ensure position limits are properly enforced. Firms that allow customers to exceed limits, or that fail to submit required LOPR reports, are subject to fines and sanctions. For example, FINRA fined BofA Securities, Inc. $5 million in 2022 for failing to make proper LOPR reports in over 7 million instances.
A related (but different) concept is exercise limits. For the same basic reason - preventing investors from quickly becoming significant shareholders - options rules also limit how many contracts can be exercised (or assigned) within a five-business-day (one calendar week) period.
Each options class has its own exercise limit, and you don’t need to memorize specific limits for the exam. In practice, many stocks have an exercise limit of 250,000 contracts. This limits investors from exercising more than 250,000 contracts on the same side of the market (combining bullish positions together and bearish positions together, similar to position limits).
Let’s look at a practice question:
ZZZ stock maintains an exercise limit of 10,000 contracts. Assuming the contracts below were exercised or assigned within the same calendar year in an individual’s account, which set violates exercise limit rules?
A) 6,000 long calls on January 5th and 5,000 long puts on January 7th
B) 6,000 long calls on January 5th and 5,000 short puts on January 20th
C) 6,000 long puts on January 5th and 5,000 short calls on January 8th
D) 6,000 long puts on January 5th and 5,000 short puts on January 7th
Answer = C) 6,000 long puts on January 5th and 5,000 short calls on January 8th
Long puts and short calls are both bearish, and the combined 11,000 contracts exceed the 10,000 exercise limit. Both exercises occurred within a five-business-day window, so the exercise limit was exceeded.
Answer choices A and D appear to exceed 10,000 contracts, but each combines one bullish position with one bearish position. Because they are not on the same side of the market, the contract counts are not combined. Therefore, A and D do not violate exercise limits.
Answer choice B contains two bullish option types, and the combined contracts exceed 10,000. However, the exercises occurred more than five business days apart. Therefore, exercise limits are not violated.
Position and exercise limits apply to individual investors, financial representatives investing with discretionary authority, and groups “acting in concert” (investing together).
Discretionary authority occurs when a financial representative receives trading authorization from a client and places trades on the client’s behalf. Discretionary accounts are often used by investors who don’t have the time and/or knowledge to manage their own portfolios. Representatives with discretionary authority are subject to position and exercise limits for the portfolios they control.
Groups “act in concert” when they invest together toward a shared goal. For example, spouses must combine their portfolios for position-limit purposes because married couples are considered always “acting in concert.” Similarly, a joint account with multiple owners placing trades together is considered “acting in concert.” These groups are also subject to position and exercise limits.
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