Option Exercise Assignment

Options Trading Topic: More about option exercise and option assignment

Dear Options Trading FAQ:

I love to trade options. I was interested to see your letter about exercise and assignment of options as I am a seller of options myself (buy-writes against stock). I’m still a little foggy on it so I thought I’d write. BTW can I be put on your e-mail list?

OK, let's flip the question a little bit. I have 300 shares of ABC and I wrote 5 November call options at 100 for 7/8. The stock price is now 100 and the call options are worth around 3 1/4. From what you've said, these calls (probably) won't be exercised because they're worth more on the open market. However, if the stock moves up, these calls are going to appreciate accordingly as well since they are in the money. In the most extreme case, wouldn't these calls be worth more as options as long as they are in the money? On the day of expiration, will they expire worthless or will they be automatically exercised if they're still in the money?

Optioned Out Option Strategist

Dear Down but Never Out:

Sure, you can be put on the Options Trading FAQ list. Good thing you asked while there are still openings! But seriously, there’s really nothing to getting on the list. I’m proud to say that it has become very popular and critically acclaimed among option traders. With some journalists and financial writers, it is considered a must read option primer. Welcome and enjoy!

As for your options question, everything seems OK with what you wrote until the end. Yes, the in-the-money option will move lock-step with the common stock. Yes, the calls will be worth more as options and that is why they don’t get assigned right away. BUT, that may change as expiration nears and as they get deeper in the money. That is, during expiration week, they may lose all the time and volatility premium and reflect only intrinsic worth. When they trade towards parity like this, they have a much higher likelihood of getting exercised.

At times the price of the call option may dip below the intrinsic value (trading at a discount). When this happens, the option holders will have to exercise the option to realize more than a straight open market sale and you will receive the assignment notice. If you don’t get assigned, as in your scenario, the options will go all the way to expiration day. At the close of that day, the exercise will be automatically done if the call option is in the money.

As I mentioned in a previous letter, you can also be assigned if the stock lands exactly on the strike price or even if it closes below the strike (making the call theoretically worthless).

The timing of dividends can influence assignments as well as any type of inside information. Also we can see seemingly strange assignments or non-assignments at times. I’ve gotten a few letters that sketch out stories of assignments that don’t seem to make any sense. Oh well, the vagaries of option trading.

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 Exercise, Options Assignment

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