Assignment questions

Discussion in 'Options' started by HOBO, Apr 6, 2007.

  1. HOBO


    How does the option clearing corporation allocate early exercises?
    Is there a predetermined selection system or are assignments random?

    If an option holder elects not to exercise ITM options at expiry, how is it determined who will NOT be assigned?
  2. Random as far as I was taught.

    Options that are ITM by more than 0.05 are automatically excercised.
  3. the OCC distributes assignments to brokerages randomly, then the brokerages have their own method (which must be approved by the OCC) for distributing them, some might be FIFO, others might be random.
  4. HOBO


    If the OCC has to assign 10 contracts early, do they run a lottery 10x (one for each contract) or one lottery for the whole lot (assuming the broker holds 10 contract to offset)?

    Any idea what method IB uses for assignments?
    Hope it is LIFO or random. I think FIFO would be unfair with options. Long-term option shorts should be receiving preferential treatment and be able to keep their seniority. (LOL. Now, I sound like a union guy).
  5. HOBO


  6. FIFO is a perfectly legitimate way to distribute options assignments. After all, the longer you are short an option (american option), the greater the chance you will receive an assignment.

    Either way, most of the time when there's 1 person exercising, the majority will be exercising.

    The KEY points you have to look out for when you're at risk fo assignment are:

    1, for calls) It's the day before ex-dividend
    2, for puts) When the corresponding call option's value drops to < .05
    bookish likes this.
  7. Kind of relevant...

    My May 70 call for PCU was assigned to me today, 4.5 trading days before expiration. I sold it (covered) on 3/20 at the money and it was assigned today, 5/14, when it was $17.50 ITM.

    This happens to me sometimes in the week of expiration for those calls I have that are deep ITM. I consider it good for me to have my cash back in hand to find another equity to invest in now. Obviously, not selling the covered call would have been even better on this one.

  8. Div arbitrage was the reason for this. PCU was trading massive amounts of options on Fri.
  9. HOBO