Newbie Question

Discussion in 'Options' started by hlp, Jul 11, 2007.

  1. hlp


    If you are writing puts/calls and someone wants to execute the option they bought from you, can you be on the hook to "deliver" prior to the expiration date? Or will the brokerage house typically float the shares until expiration.

    I guess what I am asking is how often do options that you write get exercised where you have to either buy the shares or provide the shares and can this happen prior to expiration?

    Thanks in advance.
  2. That depends on whether you are located where the death penalty is enforced.
  3. hehe
  4. There are too many variables for a simple answer of when or how often this happens.
    If you are assigned a naked put you write, expect to own the stock. If you are assigned a call you haven't covered, expect to be short.
    I sell naked puts, but only in the amount I'm willing to own the underlying stocks.
  5. if you have written american-style options that are now in-the-money (ITM) and trading at or below parity -- you can expect early assignment.

    holders of ITM calls typically exercise early to capture a dividend. holders if ITM puts typically exercise early to eliminate cost of carry.

    ask your broker about the mechanics of assigment.
  6. How much the options are ITM is a large factor too.
  7. Actually its rare to be assigned early on calls unless there is a dividend involved. There is an expense involved in doing an early exercise which means unless you need the stock to collect the div there is NO normal reason to early exercise them. Of course this assumes we’re not looking at any take over or other action too.

    Puts are never an early exercise under any normal market condition. There are a few exceptions but they’re very very rare.
  8. Sorry, this is incorrect.
    A Put is an exercise candidate as soon as the carry cost exceeds the current price of the corresponding Call, but this should not concern you unless you are short relatively deep in the money Puts.
  9. Surely the most simple way to look at this is to determine the extrinsic value of the option (assuming no dividends are upcoming). If that is almost zero ( deep itm or near expiry or both) then there is significant risk of early exercise.
    #10     Jul 12, 2007