Understanding the fact that ITM option assignment on American options can happen at any time.... most who would exercise early, say for dividends, would need multiple contracts to see a real benifit.. so, to the question.. if i trade small lots.. 1-2 contracts and someone exercises 50 contracts.. does the OCC assign 1 individual w/ at least 50 contracts open or do they pick 50 people w/ 1 open contract??? baring liquidity issues, assume there is tons of open interest... Knowing options traders are stats nuts.. has anyone ever figured the probability of exercise.. I know its a two part question but part 1 is the meat and potatos thx all
If I remember correctly, the OCC assigns to the brokers, who then decide how and who to dole them out.
I just read that the options writer picked to be excersiced (after the broker has been assigned) is random.
it's random, and it doesn't matter how many contracts you hold vs. how many the person exercising holds. For example your friend exercises 50 contracts, 50 different people with 1 contract could be assigned in theory. I wrote 10 OEX contracts and was assigned on 5, assigned on 2 ten minutes later and not assigned on 3. They don't just match up to make the least amount of customers being assigned.
It's completely random, as far as you need to know. If you were assigned based on your position size, people would size their short positions to manipulate their chances of getting assigned early, and that would be all kinds of bad.
Actually this is not exactly true, there is a manipulation that happens around dividend time to ensure you don't get benefit from people not exercising when they should. The the assignment is random, but big traders can buy extra lottery tickets in the drawing when they want to. When early exercise is the right thing to do, but some longs don't exercise, and some lucky shorts make out. So the day before early exercise is optimal, some traders go long and short large amounts of options relative to the open interest. They coordinate it with others so they are not moving the price. They exercise the longs right away like they should. But since their shorts are suddenly a large amount of open interest, they get to be counterparty to a lot of longs that don't exercise. So if you were short in 10% of the open interest the day before, and you think you are on average getting the benefit of 10% of failures to exercise, suddenly it turns into 1%. Pretty smart strategy. It is not some conspiracy theory, there is an academic paper documenting this, I can look for it later if anybody is interested. They find huge jumps in trading volume the day before the dividend if I remember right. I think they also point the finger at the Philly exchange as where it happens most, I think they say they set up the rules there to attract this order flow.