Can I execute an option on an ETF which I can't trade due to the EU PRIIPs KID regulation?

Question

As an EU resident, I can't trade in ETFs which do not have a publicly-available PRIIPs KID document, e.g. SPY, and most American ETFs; more specifically I'm not allowed to buy or short, though I would be allowed to sell if I already held a position. It does appear possible to purchase options on such an ETF (haven't yet, but broker seems to allow it).

Given that an option is a right, but not an obligation, to buy/sell the ETF, would an option in the money allow me to do anything? Would it be settled in cash? Or it would be completely useless? Would I be able to just exit my options position before expiry, but at worse fees(aka premium)/liquidity than if I could execute it?

UPDATE: I experimentally tested it by buying in-the-money close to expiration options and executing early, both call and put, on the cheapest underlying I could find. Upon exercise I did end up with the expected position in the underlying; however, the only allowed trade in the underlying was closing the position (whether it was after exercising a call or a put). I wanted to add my experimental method here in case others find it useful.

Answer 1

I'm subject to SEC Rule 204A-1, which sets forth trading restrictions for "Access Persons" employed by financial management firms, which oftentimes leaves me in similar scenarios when I wish to place trades.

I would think that your foremost practical trades would specifically be on buy-to-open options trades, since as stated, this side of the contract will carry the right to exercise - purchase the underlying security rather than an obligation. You should be able to enter and exit long positions on calls, puts, rights, and warrants in this manner anytime before expiration.

You will likely want to avoid writing (sell-to-open) call options, particularly American-style call options, as you may be forced into execution by the counter-party at any time up to and including the expiration date, which would require you to purchase the underlying ETF to fulfill the contract. European-style call options are only executable at expiration, allowing you to plan to exit such positions (buy-to-close) ahead of expiration.

It's possible that your broker may be able to settle in cash without actually ever transferring ownership of the underlying securities to you (many large brokerage houses advertise this as a service), but you'll want to confirm that with a representative from both the brokerage as well as whichever regulatory authority is imposing the restriction in no uncertain terms before planning a strategy that explicitly closes at expiration. What may seem like semantics over simply marking-to-market at expiration vs. trading through your account in an intermediary transaction is oftentimes considered a very serious distinction by financial regulators.

Answer 2

I was confronted with the same problem, particularly for very specific US ETFs, because EU equivalents for the big ones like SPY or DIA can be found easily. My idea was to sell a short-term put with a strike price just a bit below the current price and to get assigned if the underlying drops enough.

Just as your solution with buying a call, this is only suitable if the respective ETF is not too expensive because you always have to buy 100.

You may have to repeat this process a few times until you succeed. You get paid while you wait but you risk to buy way above the market price if the underlying has dropped harder than expected.