Option Assignment of Worthless Put Options

Today's option trading topic: Assignment of "worthless" put options

Dear Options Trading FAQ:

I'm sure there is a lesson to be learned from one of my recent options trades, but I figured I'd ask an expert rather than rely on my sometimes logical, but totally false reasoning.

I couldn't resist the put option premiums in Caldor, and had to "scalp" the 7/16 by shorting the Sept 5s, with 4 days to expiration. On Friday when I called my broker at 12:55 PDT, the last trade was 5 1/4 with a bid of 5 1/8 and 5 3/8, so I figured I'd risk the last 5 minutes of trading and not close out the position. The stock closed at 5 1/8, with the bid now at 5 and the ask at 5 3/8, so I figured the options would expire worthless. I received my exercise notice on Monday, but was fortunate enough to unload on wednesday at a slight profit. The timing of the notice seemed to surprize even the broker, a grizzled options trading veteran.

Is it common for at-the-money or even out-of-the money options to be assigned (excluding any dividend capture strategy)? Could be someone got wind of the Chapter 11 filing and decided to bet on the outcome. Also, my understanding is that option exercises have to be made Saturday, altho' it could still take a while to notify the assignee.

Any insight you can provide would be much appreciated. Up till now, I've been under the (probably mistaken) notion that one was home free if the put wasn't in the money on expiration date.

I also imagine it was ominous that the put last traded at 1/8, as reported by Barrons.

Thanks, Assigned for No Stinking Reason

Dear Stinky:

Thank you for your great question. This matter comes up now and again and is most interesting to look at.

Do you remember the Gerber takeover? We had a situation where one client was short Gerber call options coming into the expiration friday. The stock closed the day at a price where the client felt it safe to not take any action to close out his position. In fact, any reasonable look at the circumstances would have also recommended that no offsetting trade be made. Well, of course, the outcome was historic. The Gerber takeover was announced and our client was assigned all of his short calls. Needless to say, the resulting short stock position turned out to be a disaster. There was a Barrons column dedicated to the topic of how these exercises meant that players had advance information on the timing of the announcement.

The moral is to remember that short option positions can be assigned to you without regard to logic. There are cases in the past where options out-of-the-money by a full 1/2 point or so were assigned for no apparent reason.

This just goes to show that nothing is a secret on Wall Street. In the Gerber situation, someone had the "scoop" and so was willing to pay the extra to grab the shares from the short option .

In your particular case, I don't feel that this was the case (inside scoop). The stock closed 5 1/8 (bid at 5) which is close enough to your short strike that an assignment is not totally bizarre. In general, any expiration where the stock lands "on-the-money", do not be surprised at any assignments. Even with "worthless" options, there are reasons why yu might get assigned (dividends, as you mentioned). With the Caldor out-of-the-money, a long put holder wanted to play out his hand over the weekend.

By the way, the Caldor situation was interesting in terms of option premium. I noted that the movement ot the option premiums seemed to presage rather well the stock moves, both the decline and in particular the snap-back.
I've rambled on enough - maybe the others can relate their tales of wacky assignments.

Hope that helps.

P.S. I'm glad the Caldor worked out for you. I guess this time the "wise-guy" exercising the option outsmarted himself!

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Options Expiration, Options Assignment

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