FINRA Series 7Processes and Confirms TransactionsMedium
A customer exercises a listed equity call option on Tuesday. Under current settlement rules, when will the resulting purchase of the underlying stock settle?
- ASame day as exercise (cash settlement)
- BFriday (T+3 from the exercise)
- CThursday (T+2 from the exercise)
- DWednesday (the next business day, T+1 from the exercise)
Show answer & explanationAnswer & explanation
Correct answer: D. Wednesday (the next business day, T+1 from the exercise)
Exercising a call option creates a regular-way stock purchase, which settles on a T+1 basis under the current settlement cycle. Since the option was exercised Tuesday, the stock trade settles the next business day, Wednesday.
Why the other options are wrong
- A. Option exercises are not cash-settled stock trades; they create regular-way stock positions.
- B. T+3 has not applied to equity settlement for many years.
- C. T+2 was the settlement cycle prior to the industry-wide move to T+1.
Option Exercise Settlement
When an equity option is exercised, the resulting stock transaction settles on a regular-way T+1 basis from the date of exercise, just like any other equity trade.
- Exercise creates a regular stock trade
- Settles T+1 under current cycle
- Applies to both calls and puts upon exercise
Memory trick: Exercise today, stock trade tomorrow — T+1 rules the day.