Another Mistake by Alan Dye

The paragraph below is from an article from Alan Dye:

Making Clear When Insider Status Begins and Ends

The precise moment at which a person becomes, or ceases to be, an officer, director or ten percent owner can be critical to determining whether a transaction by that person is reportable on Form 4 (or Form 5) or is subject to matching under Section 16(b) with an opposite-way transaction occurring within less than six months. Litigated cases have demonstrated, for example, that:

"Where a ten percent owner writes a call option that will expire in less than six months and purchases a put option having the same expiration date, and the put option is in the money on the expiration date and therefore is deemed by exchange rules to be exercised "immediately prior" to the expiration of the call, the premium the insider received for writing the call option will not be recoverable under Rule 16b-6(d) where the exercise of the put caused the insider to own less than 10% of the common stock outstanding, because Section 16 is not applicable to a transaction that occurs after termination of ten percent owner status (Olagues v. Perceptive Advisors LLC, 2017 WL 3605511 (S.D.N.Y.))."

 The paragraph illustrates that Alan Dye does not understand the relevant Rules.

The paragraph above refers to a case where 10 % owner Perceptive Advisors purchased stock in Repros Therapeutics and instead of selling the stock after a large rise, Perceptive wrote calls and purchased puts in separate transactions. Some of the calls and puts had the same exercise price and expiration dates.

The puts closed in-the-money by several points on the Friday at the close of trading with expiration date being 11.59 P.M. on Saturday. The calls were out of the money and worthless and were cancelled on Friday at 5:30  March 15, 2013, since Friday at 5:30 EST was the cut off time for exercising out-of-the money calls on the Friday before Saturday March 16 , 2013 expiration day.

So the calls shorted by Perceptive were cancelled at 5:30 EST Friday. And the puts owned by Perceptive were exercised 1 1/4 days later.

Additionally, exercising a put when you are long stock does not immediately create a sale of the shares you were long. The long put position was a contract between the owner of the put and another  person. The put exercise creates a short stock position which could be later covered by the person exercising the puts with the long stock after the exercise. But until the instructions are given to cover the short position by the person holding the "short against the box" position, the holder is still long the stock for section 16 b purposes.

Below is 

§ 240.16b-6 Derivative securities.

(d) Upon cancellation or expiration of an option within six months of the writing of the option, any profit derived from writing the option shall be recoverable under section 16(b) of the Act. The profit shall not exceed the premium received for writing the option. The disposition or closing of a long derivative security position, as a result of cancellation or expiration, shall be exempt from section 16(b) of the Act where no value is received from the cancellation or expiration.

But the court refused to enforce Rule 16 b-6(d), where it says "Upon cancellation..." , which occurred prior to the precise expiration time of the put or call option.

And the court apparently did not understand exactly what happens when puts are exercised, by a holder of stock. It is certain that a short against the box occurs upon exercise, when the long shares are owned at the time of the exercise of the puts.

The fact that the cancellation of the calls took place prior to the exercise of the puts was confirmed by the CBOE , the OIC and the OCC and the Clearing firms and the foremost option trader in the world. Below is from the OIC (the Options Industry Counsel):

Options Exercise

"Can I exercise my right to buy the stock at any time up to the expiration date?
As the holder of an equity or ETF call option, you can exercise your right to buy the stock throughout the life of the option up to your brokerage firm's exercise cut-off time on the last trading day. Options exchanges have a cut-off time of 5:30 p.m. CT, for receiving an exercise notice. Be aware that most brokerage firms have an earlier cut-off time for submitting exercise instructions in order to meet exchange deadlines."

The in the money options will be exercised on the Saturday after the last trading day. The out of the money options will be cancelled at 5:30 P.M. Friday unless instructions are given prior to 5:30 p.m. CT on Friday. 

The conclusion that an exercise of puts when long  the stock creates a short against the box (i.e. long stock and short the same stock) was also confirmed by the CBOE, the OIC and the OCC, the Clearing firms and the foremost options experts in the world. These facts were confirmed to the Second Circuit.

So the court's decision is wrong and the paragraphs above, make clear that Mr. Dye is misleading his followers in order to expand the exemptions.


John Olagues


Edited Tue, Nov 5, 2019 4:43 PM

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