While markets were still closed because of Sandy, I read that exchanges were scrambling to open by Wednesday, the 31st. Fund managers wanted an opportunity to sell their losers and buy other stocks before the end of the their fiscal year on the 31st. I also read that some options would be expiring. I verified what I suspected: included among the expiring options were VIX options.
A few readers might have held some of those expiring options. Far more readers trade index and stock options. What would happen, you might wonder, if Sandy had hit at the end of an expiration week, when index and stock options expired? What would be the settlement value for your options? If you were trading an AAPL call debit spread, what would have happened if the settlement value was above your long call but below your sold call's settlement value? Maybe you had no intentions of actually buying the stock. You were just trading options. Would your long call be automatically exercised, what the OCC (formerly Options Clearing Corporation) calls "exercise by exception"? If the short call wasn't in the money according to whatever that settlement value was finally determined to be, that one wouldn't automatically be exercised for you, of course. Would you find yourself the hapless owner of AAPL stock you never intended to buy?
It was time for a call to the OCC help line, available to anyone seeking a quick answer to options-related questions. The number can be found in the upper-right-hand-corner of the website for the educational arm of the OCC. Darren, working the hotline that day, affirmed that although OCC and Exchange By-Laws and Rules do cover some of these out-of-the-ordinary situations, to some extent, this situation had been unique. Sandy required agreements made between the OCC and the exchanges about what would happen when, and other such emergency situations would likely require that kind of coordination and unique solutions.
Those agreements would concern what value would be used for settlement, whether the OCC would process "exercises by exception," those automatic exercises when your long or sold option is in the money at expiration, whether they would process voluntary exercises that you put through via your broker, and many other such situations.
Where can you find out about these decisions? The OCC lets you know through the "Latest Infomemos" section found in the center of the home page, found on the previous link. For example, Infomemo #31464 from October 29, 2012, lets us know that the "OCC will allow option exercises in the normal fashion on Monday, October 29, 2012 and Tuesday, October 30, 2012." The memo went on to explain that the various exchanges could, however, choose to restrict exercises of American-style options if the options weren't expiring, depending on each exchange's rules. It pointed readers to CBOE Regulatory Circular RG12-144 for information about such restrictions. That circular was short and sweet or not-so-sweet, depending on what an options trader hoped would happen. The OCC might have allowed options exercises in the normal fashion, but the CBOE was having none of that as of October 29 when the RG12-144 was first posted, saying that "exercises of non-expiring, American-style, cash-settled index options is prohibited today, October 29 2012, due to closure of the markets." That circular further referred readers to CBOE Rule 4.16, but I think readers have probably followed enough links by now.
A later CBOE circular, Circular RG12-147, further noted that the settlement values for FLEX Equity Options that were expiring on October 29 and 30 would be "based on closing index values as of Friday, October 26, 2012." Each unique situation will require a determination of what value will be used for settlement value in these emergency cases not covered by normal holiday and other such rules.
What's the best choice for unusual events such as these? You can check the By-Laws, and Darren suggested viewing Article 17.4 in the OCC Bylaws if you were interested in reading further. However, he reiterated that each of these emergency situations is unique and will result in unique decisions in accordance with the various bylaws and rules of the OCC and exchanges. The OCC and exchanges will always let you know, however, so that's the place to go for information. They'll likely let you know even in the case of an upcoming holiday that might impinge on what would normally be an option expiration date, for example.
That answered my questions. I hope it did yours, too.