Can you sell a put option above strike and "guarantee" assignment?

Discussion in 'Options' started by DudeExMachina, Nov 26, 2016.

  1. This is more a "thought experiment" than anything else, but I'm wondering if the odds of assignment can get close to 100% if you sell a put option above the current market price? (very new to options trading here... so apologies if my use of the lingo is atrocious)

    Seems crazy, I know, but I'm curious how this would play out in the market. If a stock is trading at $20, and I sell a long put option at something ridiculous like $25, then am I close to guaranteeing that I'll be assigned those shares at that price? If I was the put buyer, seems like I'd take that deal immediately and smile at the idiot who sold me the option in the first place.

    Just to tease a friend, I was joking around with my "new" strategy of buying a long put option that's deeeeep in the money and then selling a put option that's a little less in the money. I noticed on a few stocks that the premium offset from buying and selling the option can be overcome by a small profit with the difference in the share price.

    Real world example here on MSFT Jan 2019 puts (not considering commission fees):
    Current mkt price $60.53
    Sell 1 JAN 2019 65.00 put and collect $1130
    Buy 1 JAN 2019 75.00 put and pay $1840
    In the hole by $710!
    So... If I get assigned the shares at $65, I execute my $75 put to make $1000 on the trade. Subtract out my loss on the put purchase, and it looks like I make $290. When I look at my actual broker fees, after all the dust settles this trade would make closer to $250 on a one contract increment.

    This whole thing only works if I get assigned the shares... hence my question. If I sell a ridiculously in the money long put option, what are the odds I get assigned, and any chance that assignment comes in the near term rather than near expiration? For this play, obviously the sooner the assignment the better.

    Or, in my naivety of options trading, am I missing something completely here and this is just foolish alchemy?
     
  2. xandman

    xandman

    The delta can be seen as an approximation of probability. But, it will be less precise the closer you get to expiration and/or the ATM.

    The trade will be hard to execute. The MM will demand at least .25c -.50c a contract. What you perceive as a profit margin at mid/point could just be the MM leaning against the skew.

    Why not just buy volatility at the low during the most bullish time of the trading year?

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    CBC likes this.
  3. You are missing smth... What happens if MSFT is at 74 in Jan 2019?
     
  4. wartrace

    wartrace

    Nothing happens. When the put is exercised it no longer exists. Since he was long the put I guess he missed out on keeping the premium from his short put and the buck he could have made on the long put.
     
  5. I think you're closer to my point on this one, wartrace. But the real thing I'm playing with here is that I have absolutely no intention of holding the long put and I want to get assigned immediately. In this hypothetical strategy, I don't care about the market over time - I just want to make a mechanical play against the pricing dynamics that earns me some income.

    Like I said in my first post - kind of just a thought experiment here and wondering if it would actually work. I'd see this more as a small income trading strategy if you could pull it off. The linchpin that I'm trying to understand is, can I create a scenario where I "guarantee" that I'll get assigned? I'm not brave (silly) enough to try selling a put like this above strike price just to see if the strategy would work. I'm hoping someone else has more knowledge of how this plays in the market!

    Totally admit that I'm a novice here, and I may not be interpreting the full impact of all the variables in this type of trade setup.
     
    Last edited: Nov 27, 2016
  6. "Nothing happens", while profound, doesn't really help. What would be the PNL on the put spread for which the OP paid ca $7?

    As to the OP's idea, this isn't really how options work. Why would anyone want to early exercise a put with quite a bit of time value?
     
    Last edited: Nov 27, 2016
    CBC likes this.
  7. FSU

    FSU

    What you are missing here is that your short put will not be assigned. Based on your prices, you are selling the put with 4.80 in premium. No one would exercise an option in this instance. Its really that simple.
     
  8. JackRab

    JackRab

    No free lunch...

    If stock moves up past your long put, you will lose the total premium paid for the spread... so $710 loss. That's your risk. It's just a bit of a delta game, with your strategy you would be short delta's so you make money when the stock drops... when it goes up, you will lose. Ultimately on expiry your break even point is stock at 67.90....

    You will not get assigned until the 65 put is sufficiently ITM, with only intrinsic value left.... no trader in their right mind will exercise a put early when it still has premium above intrinsic value....
     
  9. The fundamental observation, to summarize, is the following:
    - the reason the put spread is trading at less than intrinsic ($7.1 vs $10 in your example) is time value
    - time value is also the reason why you will not be assigned on the put

    You can't have one without the other, which means there's no free lunch. This, I believe, is what the other posters have suggested also.
     
    JackRab likes this.
  10. affan

    affan

    Can option be exercised early with lots of premium still left? Of course. Odds of that happening? Very close to zero. Hence not a viable trading strategy.
     
    #10     Dec 3, 2016