This rule is no longer applicable. NASD Rule 2522 has been superseded by FINRA Rule 4210. Please consult the appropriate FINRA Rule.
(C) if a Treasury bill underlies the option contract, the difference between the principal amount of such Treasury bill and the aggregate discount amount;
(D) if an index stock group underlies the option contract, the exercise price of the option contract times the index multiplier; or
(E) if a GNMA underlies the option contract, the exercise price of the option contract multiplied by the nominal principal amount of the underlying GNMA covered by such option contract. In the case of an underlying GNMA, if the remaining unpaid principal balance of a GNMA delivered upon exercise of an option contract is a permissible variant of, rather than equal to, the nominal principal amount, the aggregate exercise price shall be adjusted to equal the product of the exercise price and such remaining unpaid principal balance, plus in each case the appropriate differential.
(3) Annualized Discount
The term "annualized discount" as used with reference to a Treasury bill means the percent discount from principal amount at which the Treasury bill may be purchased or sold, expressed as a discount for a term to maturity of 360 days.
(4) Applicable Current Options Disclosure Document
The term "applicable current Options Disclosure Document" means, as to any kind of option, the most recent edition of the Options Disclosure Document and any supplement that pertains to that kind of option and that meet the requirements of SEC Rule 9b-1.
(5) Appropriate Differential
The term "appropriate differential" as used with reference to a GNMA option contract means a positive or negative amount equal to the product of (A) the difference between the remaining unpaid principal balance of a GNMA delivered upon exercise of that contract and the nominal principal amount, and (B) the difference between the current cash market price of GNMAs bearing the same stated rate of interest as that borne by the GNMA delivered upon exercise and the exercise price.
(6) Box Spread
The term "box spread" means an aggregation of positions in a long call and short put with the same exercise price ("buy side") coupled with a long put and short call with the same exercise price ("sell side") structured as: (A) a "long box spread" in which the sell side exercise price exceeds the buy side exercise price or (B) a "short box spread" in which the buy side exercise price exceeds the sell side exercise price, all of which have the same contract size, underlying component or index and time of expiration, and are based on the same aggregate current underlying value.
(7) Broad Index Stock Group
The term "broad index stock group" means an index stock group of 25 or more stocks whose inclusion and relative representation in the group are determined by the inclusion and relative representation of their current market prices in a widely-disseminated stock index reflecting the stock market as a whole or an inter-industry sector of the stock market.
(8) Broad Index Stock Group Option (Contract)
The term "broad index stock group option (contract)" means an option contract on a broad index stock group.
(9) Butterfly Spread
The term "butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as either: (A) a "long butterfly spread" in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price or (B) a "short butterfly spread" in which two long options in the same series offset one short option with a higher exercise price and one short option with a lower exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in ascending order.
(10) Calendar Spread
The term "calendar spread" or "time spread" means the sale of one option and the simultaneous purchase of another option of the same type, both specifying the same underlying component with the same exercise price or different exercise prices, where the "long" option expires after the "short" option.
(11) Call
The term "call" means an option contract under which the holder has the right, in accordance with the terms of the option, to purchase from The Options Clearing Corporation:
(A) the number of shares of the underlying stock (if a single stock underlies the option contract);
(B) the principal amount of the underlying security (if a Government security underlies the option contract);
(C) the multiple of the current index group value of the underlying group (if an index stock group underlies the option contract); or
(D) the nominal principal amount or any permissible variant of the underlying GNMA (if a GNMA underlies the option contract) covered by the option contract.
(12) Class (of Options)
The term "class (of options)" means all option contracts of the same type and kind covering the same underlying security or underlying stock group.
(13) Clearing Member
The term "clearing member" means a member which has been admitted to membership in The Options Clearing Corporation pursuant to the provisions of the rules of The Options Clearing Corporation.
(14) Closing Purchase Transaction
The term "closing purchase transaction" means an option transaction in which the purchaser's intention is to reduce or eliminate a short position in the series of options involved in such transaction.
(15) Closing Sale Transaction
The term "closing sale transaction" means an option transaction in which the seller's intention is to reduce or eliminate a long position in the series of options involved in such transaction.
(16) Complement
The term "complement," as used with reference to an annualized discount, means the difference between 100 percent and the annualized discount.
(17) Covered
(A) The term "covered" in respect of a short position in a call option contract means that the writer's obligation is secured either by a "specific deposit" or an "escrow deposit" meeting the conditions of Rule 610(e) or 610(h), respectively, of the rules of The Options Clearing Corporation, or by a letter of guarantee meeting the requirements of
[Rule 2520](f)(2)(H)(iv) or that the writer holds in the same account as the short position,
(i) on a share-for-share basis (if a single stock underlies the option contract),
(ii) on the basis of a matching principal amount (if a Government security underlies the option contract),
(iii) on the basis of market value ("covering" underlying stocks) or of the index multiplier ("covering" option contracts) (if an index stock group underlies the option contract), or
(iv) on the basis of the remaining unpaid principal balance (if a GNMA underlies the option contract),a long position either in the underlying security or underlying index stock group or in an option contract of the same class having an expiration date on or subsequent to the expiration date of the option contract in such short position and having an exercise price equal to or less than the exercise price of the option contract in such short position.
(B) The term "covered" in respect of a short position in a put option contract means that the writer's obligation is secured by a letter of guarantee meeting the requirements of
[Rule 2520](f)(2)(H)(iv) of this Rule or that the writer holds in the same account as the short position,
(i) on a share-for-share basis (if a single stock underlies the option contract),
(ii) on the basis of a matching principal amount (if a Government security underlies the option contract),
(iii) on the basis of the index multiplier (if an index stock group underlies the option contract), or
(iv) on the basis of a matching remaining unpaid principal balance (if a GNMA underlies the option contract),a long position in an option contract of the same class having an expiration date on or subsequent to the expiration date of the option contract in such short position and having an exercise price equal to or greater than the exercise price of the option contract in such short position.
(C) In the case of a "covering" underlying GNMA, the remaining unpaid principal balance must be equal to, or be a permissible variant of, the nominal principal amount and the "covering" underlying GNMA must bear a qualifying rate of interest.
(18) Current Cash Market Price
The term "current cash market price" as used with reference to GNMAs means the prevailing price in the cash market for GNMAs bearing a particular stated rate of interest to be delivered on the next applicable monthly settlement date determined in the manner specified in the rules of The Options Clearing Corporation.
(19) Current Options Disclosure Document
See "Applicable Current Options Disclosure Document."
(20) Current Index Group Value
The term "current index group value" means $1.00 multiplied by the current value reported for the index that is derived from the current market prices of the stocks in the group. When used with reference to the exercise of an index stock group option, the value is the last one reported on the day of exercise or, if the day of exercise is not a trading day, on the last trading day before exercise.
(21) Current Market Value or Current Market Price
The terms "current market value" or "current market price" of an option, currency warrant, currency index warrant or stock index warrant are as defined in Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.
(22) Designated Rate
The term "designated rate" as used with reference to a GNMA option means a rate of interest of eight percent or such other rate as may be designated in the manner specified in the rules of The Options Clearing Corporation.
(23) Dominant Underlying Stock
The term "dominant underlying stock" means, when used with reference to an industry index stock group, a stock that accounts for 30 percent or more of the index group value.
(24) Escrow Agreement
The term "escrow agreement," when used in connection with cash settled calls, puts, currency warrants, currency index warrants, or stock index warrants carried short, means any agreement issued in a form acceptable to NASD under which a bank holding cash, cash equivalents, one or more qualified equity securities or a combination thereof in the case of a call or warrant or cash, cash equivalents or a combination thereof in the case of a put or warrant is obligated (in the case of an option) to pay the creditor the exercise settlement amount in the event an option is assigned an exercise notice or, (in the case of a warrant) the funds sufficient to purchase a warrant sold short in the event of a buy-in.
(25) Exchange Option Transaction
The term "Exchange option transaction" means an option transaction effected on the floor of a registered securities exchange between or among members.
(26) Exchange Options Trading
The term "Exchange options trading" means options trading on the floor of a registered securities exchange.
(27) Exercise Price
The term "exercise price" in respect of an option contract means:
(A) if a single stock underlies the option contract, the stated price per share at which the underlying stock;
(B) if a Treasury bond or Treasury note underlies the option contract, the specified percentage of the principal amount at which the underlying Treasury security;
(C) if a Treasury bill underlies the option contract, the specified complement of the annualized discount at which the underlying Treasury bill;
(D) if an index stock group underlies the option contract, the specified index group value at which the current index group value; or
(E) if a GNMA underlies the option contract, the specified percentage of the nominal principal amount (assuming delivery of a GNMA bearing a stated rate of interest equal to the designated rate) at which the underlying GNMA; may be purchased (in the case of call) or sold (in the case of a put) upon the exercise of such option contract. In the case of an underlying GNMA, if the stated rate of interest of a GNMA delivered upon exercise of an option contract is a qualifying rate other than the designated rate, the exercise price shall be an amount which provides the same yield to maturity as the amount which would have been payable if the stated rate of interest had been equal to the designated rate (assuming a 30-year term and prepayment at the end of the twelfth year of the mortgage obligations underlying GNMAs).
(28) Exercise Settlement Amount
The term "exercise settlement amount" shall mean the difference between the "aggregate exercise price" and the "aggregate current index value" (as such terms are defined in the pertinent By-Laws of the Options Clearing Corporation).
(29) Expiration Date
The term "expiration date" in respect of an option contract means the date and time fixed by the rules of The Options Clearing Corporation for the expiration of all option contracts covering the same underlying security or underlying index stock group and having the same expiration month as such option contract.
(30) Expiration Month
The term "expiration month" in respect of an option contract means the month and year in which such option contract expires.
(31) GNMA
The term "GNMA" means a mortgage pass-through security guaranteed as to timely payment of principal and interest by the Government National Mortgage Association, as described in the current standard prospectus of the Department of Housing and Urban Development covering such securities, bearing a stated rate of interest which is a qualifying rate. Any two or more separate certificates representing GNMAs bearing the same qualifying rate delivered in accordance with the rules of The Options Clearing Corporation upon exercise of an option contract shall, for purposes of this Rule, be deemed to be a single GNMA, having a remaining unpaid principal balance equal to the sum of the remaining unpaid principal balances of such separate certificates.
(32) GNMA Option (Contract)
The term "GNMA option (contract)" means an option contract on GNMAs.
(33) GNMA Production Rate
The term "GNMA production rate" means a rate of interest .50 percent below the maximum stated rate of interest on residential mortgages which the Federal Housing Administration is willing to insure and which the Veterans Administration is willing to guarantee, as it may vary from time to time in accordance with official announcements of changes in such rates made by the Federal Housing Administration.
(34) Government Security
The term "Government security" means a bond, note, bill, debenture or other evidence of indebtedness that is a direct obligation of, or an obligation guaranteed as to principal or interest by, the United States or a corporation in which the United States has a direct or indirect interest (except debt securities guaranteed as to timely payment of principal and interest by the Government National Mortgage Association).
(35) Government Security Option (Contract)
The term "Government security option (contract)" means an option contract on Government securities.
(36) Index Multiplier
The term "index multiplier" as used with reference to an index stock group option contract means the amount specified in the contract by which the current index group value is to be multiplied to arrive at the value required to be delivered to the holder of a call or by the holder of a put upon valid exercise of the contract.
(37) Index Stock Group
The term "index stock group" means either a broad index stock group or an industry index stock group.
(38) Index Stock Group Option (Contract)
The term "index stock group option (contract)" means either a broad index stock group option contract or an industry index stock group option contract.
(39) Industry Index Stock Group
The term "industry index stock group" means an index stock group of six or more stocks whose inclusion and relative representation in the group are determined by the inclusion and relative representation of their current market prices in a widely-disseminated stock index reflecting a particular industry or closely-related industries.
(40) Industry Index Stock Group Option (Contract)
The term "industry index stock group option (contract)" means an option contract on an industry index stock group.
(41) Kind of Option
The term "kind of option" means either a stock option contract, a Government security option contract, a broad index stock group option contract, an industry index stock group option contract or a GNMA option contract.
(42) Long Calendar Butterfly Spread
The term "long calendar butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as two short options with the same exercise price, offset by a long option with a lower exercise price and a long option with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar butterfly spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread and one long butterfly spread, as defined in this rule.
(43) Long Calendar Condor Spread
The term "long calendar condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar condor spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread and two long butterfly spreads, as defined in this rule.
(44) Long Condor Spread
The term "long condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads, as defined in this rule.
(45) Long Position
The term "long position" means the number of outstanding option contracts of a given series of options held by a person (purchaser).
(46) Nominal Principal Amount
The term "nominal principal amount" as used with reference to a GNMA option means the remaining unpaid principal balance of GNMAs required to be delivered to the holder of a call or by the holder of a put upon exercise of an option without regard to any variance in the remaining unpaid principal balance permitted to be delivered upon such exercise and shall be $100,000 in the case of a single call or put.
(47) Opening Purchase Transaction
The term "opening purchase transaction" means an option transaction in which the purchaser's intention is to create or increase a long position in the series of options involved in such transaction.
(48) Opening Writing Transaction
The term "opening writing transaction" means an option transaction in which the seller's (writer's) intention is to create or increase a short position in the series of options involved in such transaction.
(49) Option (Contract)
The term "option (contract)" means a put or a call issued, or subject to issuance, by The Options Clearing Corporation pursuant to the rules of The Options Clearing Corporation.
(50) Option Transaction
The term "option transaction" means a transaction for the purchase or sale of an option contract, or for the closing out of a long or short position in an option contract.
(51) Options Trading
The term "options trading" means trading in any option issued by The Options Clearing Corporation, whether or not of a type, class or series that has been approved for trading on a national securities exchange.
(52) Outstanding
The term "outstanding" in respect of an option contract means an option contract which has been issued by The Options Clearing Corporation and has neither been the subject of a closing sale transaction on or through the facilities of, or otherwise subject to the rules of, a Participating Exchange or Association nor been exercised nor reached its expiration date.
(53) Participating Exchange (Association)
The term "Participating Exchange (Association)" means a national securities exchange (association) which has qualified for participation in The Options Clearing Corporation.
(54) Primary Market
The term "primary market" means (A) in respect of an underlying security that is principally traded on a national securities exchange, the principal exchange market in which the underlying security is traded and (B) in respect of an underlying security that is principally traded in the over-the-counter market, the market reflected by any widely recognized quotation dissemination system or service .
(55) Public Customer of a Member Organization
The term "public customer of a member organization" means a customer that is not a broker or a dealer.
(56) Put
The term "put" means an option contract under which the holder has the right, in accordance with the terms of the option, to sell to The Options Clearing Corporation:
(A) the number of shares of the underlying stock (if a single stock underlies the option contract);
(B) the principal amount of the underlying security (if a Government security underlies the option contract);
(C) the multiple of the current index group value of the underlying group (if an index stock group underlies the option contract); or
(D) the nominal principal amount or any permissible variant of the underlying GNMA (if a GNMA underlies the option contract);covered by the option contract.
(57) Qualifying Rate
The term "qualifying rate" as used with reference to a GNMA option means any rate of interest equal to or less than the GNMA production rate, provided that:
(A) in the event of any increase in the GNMA production rate, a GNMA issued prior to the date of any such change bearing a stated rate of interest equal to any such increased GNMA production rate (or any lower rate of interest which was not a qualifying rate on the day prior to that date) shall be deemed not to bear a qualifying rate until the expiration of 45 days from the date of such increase or until after the settlement date for options on GNMAs following the next expiration date for any series of such options, whichever shall last occur unless such GNMA bears a stated rate of interest deemed to constitute a qualifying rate in accordance with subparagraph (B) below; and
(B) in the event of any decrease in the GNMA production rate, a GNMA bearing a stated rate of interest which was equal to the GNMA production rate (or any lower rate of interest which is not otherwise a qualifying rate) on the day prior to the date of any such decrease shall be deemed to continue to bear a qualifying rate for a period of 45 days from the date of such decrease or until the settlement date for options on GNMAs following the next expiration date for any series of such options, whichever shall last occur.
(58) Registered Clearing Agency
The term "registered clearing agency" shall mean a clearing agency as defined in Section (3)(a)(23) of the Act that is registered with the Commission pursuant to Section 17A(b)(2) of the Act.
(59) Registered Options Principal
The term "Registered Options Principal" means a person who has qualified as a "Registered Options Principal."
(60) Registered Options Representative
The term "Registered Options Representative" means a registered representative who has qualified as a "Registered Options Representative."
(61) Related Security
The term "related security" means:
(A) as used with reference to a Government security option, (i) all securities underlying Government security options, (ii) futures contracts on such underlying security, and (iii) all options on such futures contracts;
(B) as used with reference to a stock option, the underlying stock; and
(C) as used with reference to an index stock group option, (i) all futures contracts on the underlying stock group or on any substantially identical index stock group, all options contracts on any substantially identical index stock group, and all options on such futures contracts, and (ii) also, in the case of an industry index stock group option only, all underlying stocks accounting for five percent or more of the current index group value of the underlying industry index stock group and all individual stock options on such underlying stocks.
(62) Rules of The Options Clearing Corporation
The term "rules of The Options Clearing Corporation" means the by-laws and the rules of The Options Clearing Corporation and all written interpretations thereof, as the same may be in effect from time to time.
(63) Series (of Options)
The term "series (of options)" means all option contracts of the same class of options having the same expiration date, exercise price and unit of trading.
(64) Shares
The term "shares" means the basic unit of issue of a stock.
(65) Short Calendar Iron Butterfly Spread
The term "short calendar iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron butterfly spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread, one long butterfly spread, and one short box spread, as defined in this rule.
(66) Short Calendar Iron Condor Spread
The term "short calendar iron condor spread" means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices and a long call with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron condor spread cannot be composed of cash-settled, European-style index options. This strategy can also be considered a combination of one long calendar spread, two long butterfly spreads, and one short box spread, as defined in this rule
(67) Short Iron Butterfly Spread
The term "short iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of one long butterfly spread and one short box spread, as defined in this rule.
(68) Short Iron Condor Spread
The term “short iron condor spread” means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices, and a long call with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads and one short box spread, as defined in this rule.
(69) Short Position
The term "short position" means the number of outstanding option contracts of a given series of options with respect to which a person is obligated as a writer (seller).
(70) Stock
The term "stock" shall be broadly interpreted to mean any equity security, as defined in Section 3(a)(11) of the Act, and SEC Rule 3a11-1 under the Act, that confers directly on the holder a present equity ownership or participation interest in an enterprise.
(71) Stock Option (Contract)
The term "stock option (contract)" means an option contract on a single stock.
(72) Stock Index Warrant
The term "stock index warrant" shall mean a put or call warrant that overlies a broad index stock group or an industry index stock group.
(73) Stock-Related Option (Contract)
The term "stock-related option (contract)" means either a stock option contract, a broad industry index stock group option contract or any industry index stock group option contract.
(74) The Options Clearing Corporation
The term "The Options Clearing Corporation" means The Options Clearing Corporation, a subsidiary of the Participating Exchanges and Association.
(75) Treasury Bill
The term "Treasury bill" means a Government security sold by the U.S. Treasury Department at a discount from principal amount, bearing no interest and normally having a term to maturity of not more than one year at the time of original issue.
(76) Treasury Bond
The term "Treasury bond" means a Government security sold by the U.S. Treasury that has been designated by the U.S. Treasury Department with reference to its term to maturity as a "bond" (normally confined to Treasury securities with a term to maturity of more than ten years at the time of original issue).
(77) Treasury Note
The term "Treasury note" means a Government security sold by the U.S. Treasury Department that has been designated by the U.S. Treasury Department with reference to its term to maturity as a "note" (normally confined to Treasury securities with a term to maturity of more than one year but not more than ten years at the time of original issue).
(78) Type of Option
The term "type of option" means the classification of an option contract as either a put or a call.
(79) Uncovered
The term "uncovered" in respect of a short position in an option contract means that the short position is not covered.
(80) Underlying Component
The term "underlying component" shall mean in the case of stock, the equivalent number of share: industry and broad index stock groups, the current index group value and the applicable index multiplier; U.S. Treasury bills, notes and bonds, the underlying principal amount; foreign currencies, the units per foreign currency contract; and interest rate contracts, the interest rate measure based on the yield of U.S. Treasury bills, notes or bonds and the applicable multiplier. The term "interest rate measure represents, in the case of U.S. Treasury bills, the annualized discount yield of a specific issue multiplied by ten, or in the case of long term U.S. Treasury notes and bonds, the average of the yield to maturity of the specific issues multiplied by ten.
(81) Underlying GNMA
The term "underlying GNMA" means an underlying security that is a GNMA.
(82) Underlying Government Security
The term "underlying Government security" means an underlying security that is a Government security.
(83) Underlying (Index) Stock Group
The term "underlying (index) stock group" as used with reference to an index stock group option contract means the index stock group, a multiple of the current index group value at which The Options Clearing Corporation is obligated to sell (in the case of a call) or purchase (in the case of a put) upon valid exercise of the contract.
(84) Underlying Security
The term "underlying security" means:
(A) as used with reference to an option contract other than an index stock group option contract, the security which The Options Clearing Corporation is obligated to sell (in the case of a call) or purchase (in the case of a put) upon valid exercise of the contract; and
(B) as used with reference to an index stock group option contract, any of the stocks included in the underlying index stock group.
(85) Underlying Stock
The term "underlying stock" means an underlying security that is a stock.
