Selling in the money question

[yakatan]

If you sell a call and after a while it becomes in the money are you assigned at that moment or are you assigned and exercised at expiration?
IF you are assigned instantly what happens if the option price drops and becomes out of the money?

If I sell a call that is already in the money, am I instantly assigned and hence a foregone conclusion that I will be exercised?

No book has explained these last two questions.

 

[arabianights]

If you sell a call and after a while it becomes in the money are you assigned at that moment or are you assigned and exercised at expiration?

Depends on the option

IF you are assigned instantly what happens if the option price drops and becomes out of the money?

You lost money!

If I sell a call that is already in the money, am I instantly assigned and hence a foregone conclusion that I will be exercised?

Not necessarily... indeed with some options it's possible to expire in the money and for the option buyer to not bother exercising it - this would usually be the case when the underlying has expired right on the strike and transaction costs make exercising the option not worthwhile.

 

[TheBramble]

The option holder has the right to assign at any time from purchase through to expiration.

Doesn’t matter what happens to the price after you’ve been assigned.

What do you mean sell a call that is already in the money? Your sale will have included intrinsic value and time premium. The purchaser is out of pocket to the tune of the amount they’ve paid you. Why would they exercise? Bless them if they did…

 

[Martinghoul]

Main thing is for you to understand under which conditions it becomes optimal to exercise an American option before expiry. Hint, for a whole variety of options it never makes sense to assign/exercise before expiry...

 

[MrGecko]

Main thing is for you to understand under which conditions it becomes optimal to exercise an American option before expiry. Hint, for a whole variety of options it never makes sense to assign/exercise before expiry...

hmmm... what about a stock going ex-div? or options on futures, and the cost of funding the position (margin accounts earning interest)?

 

[yakatan]

Depends on the option



You lost money!



Not necessarily... indeed with some options it's possible to expire in the money and for the option buyer to not bother exercising it - this would usually be the case when the underlying has expired right on the strike and transaction costs make exercising the option not worthwhile.

In my second question in the previous post, I don't understand why I would lose money in that senario.

In a sold call, if the stock price goes above the strike price and is clearly in the money for the buyer then after a few days the spot stock price drops below the strike price and becomes out of the money and stay that way until expiration. I assume that in american style options it will be up the buyer to exercise the option when it was in the money in which case he missed his chance is that correct?


If an option is in-the-money eg call strike 70, premium 10, stock price at expiration is 75 will most call buyers exercise this option even though the stock actually cost him £80 ie £5 above the spot price?

 

[Martinghoul]

hmmm... what about a stock going ex-div? or options on futures, and the cost of funding the position (margin accounts earning interest)?

MrG, I had no doubt whatsoever that you knew the answer to the question, but it was a question for the originator...

 

[Martinghoul]

In my second question in the previous post, I don't understand why I would lose money in that senario.

In a sold call, if the stock price goes above the strike price and is clearly in the money for the buyer then after a few days the spot stock price drops below the strike price and becomes out of the money and stay that way until expiration. I assume that in american style options it will be up the buyer to exercise the option when it was in the money in which case he missed his chance is that correct?


If an option is in-the-money eg call strike 70, premium 10, stock price at expiration is 75 will most call buyers exercise this option even though the stock actually cost him £80 ie £5 above the spot price?

I think you need to think about the fundamental premise options are based on some more. Otherwise, maybe Cap'n Arab, in his infinite wisdom and kindness, can answer and help you.

 

[yakatan]

The option holder has the right to assign at any time from purchase through to expiration.

Doesn’t matter what happens to the price after you’ve been assigned.

What do you mean sell a call that is already in the money? Your sale will have included intrinsic value and time premium. The purchaser is out of pocket to the tune of the amount they’ve paid you. Why would they exercise? Bless them if they did…

What I mean is, every book I read says that once the option is in the money you get assigned, then it is up to the call buyer to exercise his option. If you have sold an option that is already in the money ( eg to collect higher premium) then what happens regarding assignment, It is already in the money, so are you instantly assigned?

Can an option buyer be unassigned so that the option goes back in the market?

Can this scenario occur? You sold an option with three months till expiry. On say the second day the stock moves through the strike price (so it is now in the money) and you are assigned but not exercised. Can the option seller be held in an assigned state until the option expiration, which in this case is three months away? Once assigned can the call seller buy a call to cancel out his sold call?

 

[Martinghoul]

The answer to your first question is, in an overwhelming majority of cases, no. Moreover, you haven't been reading the books properly. What they all say is that once the option is in the money you MAY get assigned. So let me reiterate, the main question that you need to ask is under what circumstances it actually is economic for the owner of the option to exercise early.

No, you can't un-exercise an option.

I don't understand your scenario. How can you be assigned, but not exercised? Moreover, once you're assigned, you buy/sell the underlying and the transaction is complete. The option position is no more.

 

[gooseman]

this is too general-you need to be more specific.

basically from what i understand you are saying that if the option goes ITM it is assigned. think about that a bit. if that was the case then you could only gamma trade, as soon as oyu go ITM you are assigned a 100delta position that can then lose money (as well as make money) before the expiration of the underlying.

certain contracts/exchnages will assign an ITM option automatically on the expiry of an option yes, btu these rules vary from exchange to exchange.

also you have loads of different options. bermuda/american/european/allsorts.

 

[arabianights]

yakatan, ever read hull? I'd recommend it at this stage.

 

[yakatan]

The answer to your first question is, in an overwhelming majority of cases, no. Moreover, you haven't been reading the books properly. What they all say is that once the option is in the money you MAY get assigned. So let me reiterate, the main question that you need to ask is under what circumstances it actually is economic for the owner of the option to exercise early.

No, you can't un-exercise an option.

I don't understand your scenario. How can you be assigned, but not exercised? Moreover, once you're assigned, you buy/sell the underlying and the transaction is complete. The option position is no more.

You asked me "How can you be assigned, but not exercised? " This has been my understanding so far - I thought that once your option becomes ITM you can be assigned, then it is up to the call buyer if he wants to exercise it and buy/sell the shares. You are saying that being assigned means you will definitely be exercised. If that is the case then I can't see why we need two words for it ie. assigned and exercised.

If it is the case that being assigned means you will be exercised then what is the time laps between the two? Is it the time taken to buy/sell the underlying or can the buyer defer at his leisure up to expiration day?

 

[MrGecko]

Whatever the options you are going to be trading, I will hazard a guess that they will be exchange traded (with respect, I doubt you have access to an OTC market). In which case, might I suggest you go and read the contract specifications?

All of your answers are there, and in Hull.

 

[Martinghoul]

You asked me "How can you be assigned, but not exercised? " This has been my understanding so far - I thought that once your option becomes ITM you can be assigned, then it is up to the call buyer if he wants to exercise it and buy/sell the shares. You are saying that being assigned means you will definitely be exercised. If that is the case then I can't see why we need two words for it ie. assigned and exercised.

If it is the case that being assigned means you will be exercised then what is the time laps between the two? Is it the time taken to buy/sell the underlying or can the buyer defer at his leisure up to expiration day?

You get assigned when you're short an option, you exercise when you're long. The two terms are used to reference the same exact transaction, but from two different viewpoints. Does that make things a bit clearer?

 

[yakatan]

You get assigned when you're short an option, you exercise when you're long. The two terms are used to reference the same exact transaction, but from two different viewpoints. Does that make things a bit clearer?

Thanks Martin,

I get it now. I didn't realise it was one and the same thing from different viewpoints. I thought that one followed the other ie first assignment then exercise. I can see now why members here couldn't understand what I was on about.

 

[yakatan]

Whatever the options you are going to be trading, I will hazard a guess that they will be exchange traded (with respect, I doubt you have access to an OTC market). In which case, might I suggest you go and read the contract specifications?

All of your answers are there, and in Hull.

Are you sure this is for beginners. There are an awful lot of used ones on amazon. Is that because it isn't that good?

 

[TheBramble]

Are you sure this is for beginners. There are an awful lot of used ones on amazon. Is that because it isn't that good?

LOL!

Yakatan - I am begining to wonder about you. It takes real skill to come across as you do....

 

[MrGecko]

Well, depends what you mean by beginner. Selling options, though, definately isn't.

It's a good primer, yeah.

If I were you, I'd buy a copy from amazon (remember to get the answer book as well) and visit www.thinkorswim.com and register. Their platform is excellent for a variety of reasons, and you can try ideas out on the simulator indefinately. With TOS and Hull, you should be able to pick up the basics.

 

[yakatan]

LOL!

Yakatan - I am begining to wonder about you. It takes real skill to come across as you do....

Bramble, you have come back to ridicule me? It's OK I won't take the bate.