Early Assignment

Discussion in 'Options' started by RainmanRam, Aug 18, 2009.

  1. This morning I was assigned on Aug 22 MSFT calls. I wasn't expecting to be assigned. Anyone know why I might have been? I think there was about $.02 of premium left throughout the day yesterday.

    Speaking of which, during what hours can options be exercised?

    Thanks,
    Ray
     
  2. MTE

    MTE

    MSFT went ex-div today. When you are short ITM calls you should always be mindful of the dividends.
     
  3. That makes sense. I guess when you buy options, you should pay attention as well. Exercise when dividend is greater than premium.

    Thanks,
    Ray
     
  4. MTE

    MTE

    It's not jsut the premium.

    When you are long ITM calls then you have to consider YOUR cost of carry and the decide whether to exercise or not.
     
  5. I'm not sure I follow. Do you mean the cost to carry for the one day to be recorded for the dividend?
     
  6. MTE

    MTE

    I mean, the cost of carry on the stock. If you are long a call and exercise it then you are now long stock, which means you either pay interest on margin or you forgo interest on the cash that you now have tied up in the stock.

    Plus you need to buy the corresponding put to have an equivalent position to the one you had before the exercise.

    So the dividend needs to be greater than the cost of carry+put premium.

    Obviously, the cost of carry is relatively small given that the option has only a few days to expiry.
     
  7. Thanks MTE. I'm still relatively new to options and have been using them to increase gains on stock holdings. I hadn't thought about buying the put to remove underlying risk. I guess I'm still thinking in the one dimentional arena of stock trading. Options sure are more interesting!
     
  8. MTE

    MTE

    No worries. It's the way the dividend capture works, when you want to exercise a call to collect the dividend.
     
  9. spindr0

    spindr0

    Options trading near parity (no time premium) can lead to early exercise if they trade below parity intraday
     

  10. Yeah, I mentioned that once in a thread and claimed to have seen it but was shot down that it would never happen.
     
    #10     Aug 18, 2009