Early exercise of negative time value options


Hi team, done a bit or research myself, however would like to confirm something.

I'm looking at Starwood Hotels, ticker is HOT. At the time of writing, the share price is $54.30 and the Dec12 Call 50 Strike is $4.15 on the bid.

This call has intrinsic value of $4.30 - this is how much we get if we exercise it right now. However, we can only sell this for $4.15, i.e. for less than it's intrinsic value.

Now. If I hold this option - there is no point selling it as I would be better of by exercising the option. The only decision I have to make now is when to exercise - now or at expiry.

An important point to consider is that before the option expiry HOT is paying a dividend of $1.25 on 12 Dec 2012, which means that the share price will drop by $1.25 on that day.

For a HOT Dec12 50 Call option holder, as the time value of this option is negative, it would be most beneficial to exercise this option right before the ex-date to take advantage of the dividend. And if I'm holding such an option, I don't see any reason why I shouldn't exercise before the ex-date and wait till expiry instead.

The question is. What if instead of holding this option, I am short it as a part of a multi-leg strategy. What are my chances of being assigned? As per the logic above, my assumption is that majority of these calls will be exercised early. Am I correct?



Legendary member
The further in the money the options are the greater chance of early exercise. Your option is 2 strikes away from the share price with negative time value. IMO, if these conditions persist next week you most likely will get assigned prior to the ex date.

Be aware, you won't get a notice of exercise until after the markets close for the day. You will then have to cover the short share position at the open of the next day. Anything can happen in between.



Legendary member
One important thing I overlooked.... sorry, sign of old age :)

The closing price of HOT (or any stock) is the NYSE closing price and does not reflect after hours trading. The options market trades for 15 minutes after the NYSE close (used to be that way. my info may be old on that. anyone?)

Check here: HOT After Hours Trading - NASDAQ.com

The last price traded on HOT was 54.17
Of course after hours trading can be extremely erratic but the conditions you note in your post might not actually be there.

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