My OIH Jun 140 naked put was 9 pts ITM 2 days ago and I feared I will get assigned and thus blow up my account. So I bailed out and took a big loss. Now the same option is OTM and I'm kicking myself for taking the loss. How do you assess assignment risk? Should you always be fearful of getting assigned if the naked position is ITM and moving against you?
If the price of corresponding call is less than the cost of carry on the stock then the put will be assigned. As you get closer to expiry and deeper ITM the risk increases.
Not sure if I follow you. Can you elaborate? Shouldn't the corresponding call be always less than the cost of carry on the stock? Thanks!
No, the call is usually more than the cost of carry because of time value, but when time value gets to virtually zero then you can get cost of carry to be more than the call.
or use the simple rule of thumb, is there any premium left in it? if a person can sell it for more than he would get for exercising it, then why would he?
You can short the underlying using the delta, usually 0.5, as it goes in the money and then you are hedged. If the market then looks like rallying you can take the hedge off. Margin requirement decreases while you are hedged.
Next time perhaps you can trade the index, Euro-style: http://www.cboe.com/Products/indexopts/oix_spec.aspx
I had 1 ITM put contract exercised on me last week. I guess maybe the owner had some stock he wanted to get rid of.
How do they figure who will get assigned? Is the selection random broker, who then randomly selects a client?
Yes, you are essentially correct: The OCC randomly selects clearing firm for assignment notice. The clearing firm then randomly selects individual account for assignment.