Holding ITM Puts, just don't do it?

Discussion in 'Options' started by swag, Oct 10, 2011.

  1. swag



    I read on ET some time ago a basic rule of thumb for ITM call/put early exercise, but I couldn't find it again in the search. I was hoping someone could remind me of it. It was something like if the remaining extrinsic value was very low (or something along those lines), there was a high probability the ITM option would be called away. Anyone?

    I was looking at some spreads that would be traded on American style options (I've traded European's before). Short options being called away if ITM (as part of an overall unrealized profitable spread) was a concern of mine.

    Thanks in advance.
  2. ASE1245


    ITM Call. You would only consider early exercise if:
    -Put trading at lower value than up coming dividend
    -Call trading at Parity, stock very hard to borrow with risk of buy in or negative short rate very high
    -special situation like stock tender offer.

    ITM Put. You would only consider early exercise if:
    -Interest carry on Put + Stock position higher than call on that line.
    I'm sure this is not complete....
  3. swag


    Hi, thanks for the reply. That's the gist of what I've read on the net the last couple of hours. Or simply, if the delta is near 1. But, isn't 'near' relative? I mean, is .75 and higher is a good estimate?

    I would be trading ES options so if anyone has experience being early assigned in that or a related security, that would be most helpful.
  4. swag


    I read on a TradeKing blog that supposedly short calls have less assignment risk because of the capital required by the holder to exercise.

    In that case, I could go with the synthetic short put = long stock, short call? Anyone?
  5. Keep it simple. Always assume assignment at any moment. If that is an issue then dont enter into the position.