American-style crimes: Can a bad broker steal your short position? Can a bad broker literally steal (or otherwise close) your carefully designed/analysed short US equity option position (ie. uses American-style exercise), which has a clearly lucrative & profitable outlook, by simply claiming that an early exercise (-> early assignment) has taken place? (This of course can happen at any time, the position does not even need to be ITM). What can be done in such a case? See also https://learninginvestmentwithjasoncai.com/2023/08/18/early-assignment-risk-in-options-trading/ https://bullishbears.com/are-you-at-risk-for-stock-assignment-with-options/
It appears brokers are supposed to make their policy for options exercise assignment available (at least to FINRA), and this policy is supposed to be first-in, first-out or a random method.
" short US equity option position" That's either a long put position or a short call position. If a long put the broker can't exercise early. If a short call position and the broker does an early exercise, now you're short the stock which is still a short equity position. How is the broker *stealing* your short position?
Nope. You must have a funny logic seeing a LongPut as a short. I of course mean both of ShortCall and ShortPut, not any LongOption. Of course not , but LongPut wasn't meant. In such a Call-assignment (ie. being get "called") one has to deliver the LongStock, there is no ShortStock resulting of this all, especially not in a CoveredCall trade. B/c from my POV it's indeed like a steal of the profit potential, and on top of that also a loss (when ITM, and that usually is the case). My carefully crafted/designed position (usually part of a bigger construct) gets demolished by this silly American-style exercise type, way before the expiration date. It needs to be replaced by the European-style where such early-assignment fraud crimes are not possible at all. And: IMO it's even possible that the broker simply overtakes (ie. steals) this lucrative position for the remaining time of the option. Ie. there is no early-closing at the exchange (ie. no change in OI)...
Oh, you're special! So you're short an ATM put at 0.3 and the buyer exercises. You were just paid $30 to close the position. Your risk is the same as holding the sp but now your potential gain is massively asymmetric in your favor over holding a sp and your $30 payout was accelerated. Buy yourself a Lada or perhaps a new piss bucket.
When you said "short US equity option position" I thought you meant an option position that would get you short US equities. If you're short a naked call you'll be short the stock if exercised early. You didn't specify covered call. Any early exercise is a gift to you unless there's no premium left in the option. They can't *steal* any profit with early exercise. ***Read Dest comment above.
I don't think this can happen with options, but I've seen it happen with underlying stocks where brokers call back the borrowed shares. My suspicion is that those shares were never actually borrowed. Instead, the broker was taking the other side of your trade. But who can know for sure what the real reason is.
As everybody knows, a CoveredCall consists of a LongStock and a ShortCall. The following 2 PnL charts clearly demonstrate the dangers of American-style: 1) The PnL chart of the CoveredCall: it surely looks good if stock rises: 2) The PnL chart of the ShortCall: it surely looks BAD if stock rises (ie. assignment risk exists, assignment is even imminent! Watch the blue line): Conclusion: American-style (early-exercise --> early-assignment) is a big trap for the option writers, b/c a clearly winning combi-trade (ie. the above CoveredCall) gets stopped if the stock rises! Eventhough the net result is making profit when the stock rises, if it only would not get stopped! Q.E.D.
1: With a covered call the maximum profit is achieved if the stock closed at or above the short call on expiration. If the call is exercised early I get the maximum profit without waiting for expiration. Both positions are gone. Why is that a problem? 2: With a naked short call an early exercise allows you to lock in the desired premium decay without waiting for expiration. You’ll have a loss to this point but your trade now has the same risk but greater profit potential than being short the call. Why is this a problem?