Home / Offering Memorandum / RISK FACTORS AND INVESTMENT CONSIDERATIONS / Exchange-Listed Options Risks

18.26. Exchange-Listed Options Risks

There can be no assurance that a liquid market will exist when the Investment Compartment seeks to close out an option position. Reasons for the absence of a liquid secondary market on an exchange include the following:

1. there may be insufficient trading interest in certain options;

2. restrictions may be imposed by an exchange on opening transactions or closing transactions or both;

3. trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options;

4. unusual or unforeseen circumstances may interrupt normal operations on an exchange;

5. the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or

6. one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options). If trading were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However, outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. The Investment Compartment’s ability to terminate OTC options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. If the Investment Compartment was unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise.

The hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the options markets. Call options are marked to market daily and their value will be affected by changes in the value of and dividend rates of the underlying common stocks, an increase in interest rates, changes in the actual or perceived volatility of the stock market and the underlying common stocks and the remaining time to the options’ expiration. Additionally, the exercise price of an option may be adjusted downward before the option’s expiration as a result of the occurrence of certain corporate events affecting the underlying equity security, such as extraordinary dividends, stock splits, merger or other extraordinary distributions or events. A reduction in the exercise price of an option would reduce the Investment Compartment’s capital appreciation potential on the underlying security.