What Does Allocation Motice Mean?
Allocation notice refers to a legal or official notification given to the option writer by the option clearing company that the option writer needs to generate the underlying asset as the option has been exercised by the holder. The option writer needs to discharge the contractual duty and hence may need to either sell or purchase the securities.
The term allocation notice also means the information coming by the broker to an IPO applicant about the allotment of the IPO shares. This may be information about full allocation or allocation in part.
How Does Allocation Notice Applied in Options Market?
There are a number of options that face expiry worthlessly; hence investors normally overlook the exercise option that can be availed by option holder. However, one needs to note that the delivery of the goods can be called for, in case, if the option investor holds the contracts like in-the-money options and exercises the option.
An example would make it clear. If there is an owner holding large block of shares and writing covered calls to make some money, there are high chances that the stockholder is called for delivery of shares through the broker, if there is enough appreciation in the stock to result in profitability on exercising the option
Tags: Allocation notice, discharge the contractual duty, legal or official notification, sell or purchase the securities
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