Newbie question on option exercise and assignment

Discussion in 'Options' started by User50000, Dec 16, 2003.

  1. I am new to option trading and I would appreciate it if you could help me answer this question.

    Here's the scenario...

    On Dec. 1, XYZ is trading at 50
    - I buy the Jan04 50 calls
    - I sell the Jan04 55 calls
    On Dec. 20, XZY is trading at 60

    If I am assigned on my short call position (55 strike), can I exercise my long call position (50 strike) to fulfill my assignment? This seems right to me but I just want to make sure.

    Thanks for your help! :)
  2. It's a nice problem to have. If you are assigned early on your short call (american-style exercise allows for early assignment), you must deliver the stock at the short strike. If you do not have enough shares in your inventory, you can do one of three things: buy stock and deliver it, exercise the long calls, or tell your broker to borrow shares and let you go short at the short strike (not always possible if stock is hard to borrow).

    Being able to exercise the long calls against assigned ones is the reason the margin requirement is exactly the debit you paid for the call bull spread. If you couldn't exercise long against short, the margins would be much higher.

    European-stlye options can only be exercised at the expiration. These include options on many broad-based indices: SPX, XEO, MNX, DJX, etc. So, if you have deeply in-the-money short options on these instruments, there is no risk of early assignment.

    Most every conventional, listed stock options (that I am aware of) is american-style. Hope that helps.