Timing of Option Exercise and Assignments

Topic: Timing of Option Exercise/Assignment

Dear Options Trading FAQ:

I've sold some put options on some stocks because I wanted to buy the underlying stock. The stock has moved significantly below the strike price but the puts still have not been exercised. Why is this?

In addition, I have written some covered call options on other stocks as well. Can you explain why the calls would not be exercised if the strike price is reached? In both cases, I was told that they will be exercised but during option expiration week. Can you explain this please?

Potential Assignee

Dear Potential Option Strategist:

Look at it from the option owner's point of view. His puts have a time and volatility premium above the intrinsic value. That is, he can sell those options in the open market for more than it would be worth if he were to exercise it. For example, let's say I'm long a 60 put on a stock trading at 58. That means I'm in the money by 2 points. But the premium of the option will be higher than that depending on the time of month and volatility of the stock. Let's say in this case the option is bid at 2 7/8. I could either sell it for that price or I could exercise it to realize the 2 point intrinsic value. Which would you choose? Would you take more money or less?

During options expiration week, the time value of the option is reduced to the point that it may make sense to exercise it rather than to sell it in the option market. If the option premium falls to a discount, you should expect an assignment. (This is a case where one would make more $ by exercising rather than selling the option itself.)

Also, other factors include, advance (inside) information on the stock, late breaking news, and timing of ex-dividends.

Keep in mind too, that many option holders never have any intention to exercise their options. It may be insufficient margin for the transaction or just a lack of desire to get involved with the actual stock. To each his own!

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 Broker, Options Order

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