shorting options

[alen]

If i want to go short an option, can i close my position by buying back an option with the same strike price and expiration date, or do i necessarily have to exercise my option?

 

[Directional]

if you sold short say 565 OEX calls, you cover your postion by buying 565 calls to go flat - for the same expiry of course.

 

[Anonymous]

If you short an option, assuming American style, don't you run the risk of the option being randomly assigned instead of having the right to exercise it?

 

[alen]

If you short an option, assuming American style, don't you run the risk of the option being randomly assigned instead of having the right to exercise it?

Thats the point; i dont want to exercise it; i just want to close my position.

 

[Rhody Trader]

If you short an option, assuming American style, don't you run the risk of the option being randomly assigned instead of having the right to exercise it?

If you are short, you have no right to exercise the option. Only the buyer does.

The alternatives are 1)Buy an offsetting option 2) Have the option excercised 3)The option expires.

If the option is in the money, then 2 is always a risk on an American option before expiry.

 

[Anonymous]

That's a bit more confusing isn't it.

If: you have no right to exercise the option. Only the buyer does.

yet: alternative 2) Have the option excercised

If you have no right to exercise the option how do you manipulate the buyer to have the option exercised (and why would an option seller want to do that)?

 

[Rhody Trader]

If you have no right to exercise the option how do you manipulate the buyer to have the option exercised (and why would an option seller want to do that)?

As a writer you can't manipulate the buyer in to exercising, unless you can manipulate the price of the underlying. If it makes sense for the buyer to exercise, he/she will do so, and that only makes sense if the option is in the money. Most options expire without being exercised, though.

As for "why?", unless the writer is trying to unload the underlying, there is no real benefit to having the buyer exercise. The seller would prefer the option expire.

 

[Anonymous]

There is one big headache I learnt about options. Once I bought a call option. It was in-the-money, expired.

I didn't do anything about it on expiration.

The next day the dealing room phoned me for margin.

The in-the-money call option was exercised overnight ( I wasn't watching), which led to me going long on the underlying futures (unprepared), the futures fell overnight shortly after.

 

[Rhody Trader]

There is one big headache I learnt about options. Once I bought a call option. It was in-the-money, expired.

I didn't do anything about it on expiration.

The next day the dealing room phoned me for margin.

The in-the-money call option was exercised overnight ( I wasn't watching), which led to me going long on the underlying futures (unprepared), the futures fell overnight shortly after.

Ah, you're referring to futures options. Yeah, they work differently than stock options. The exchange automatically "excercises" all in-the-money options. I found that out the hard way myself once.