OTM Early Exercise . . .

Discussion in 'Options' started by uncleTom, Oct 19, 2006.

  1. Let's say for instance I wanted to do sell OTM calls on stocks I thought had very little chance of breaking into new highs etc . .

    Can I be early exercised when the stock price is still below the strike. That wouldn't make to much sense . . but I'd rather be sure.

    Correct me if I'm wrong, but early exercise happens all the time ITM, right?
  2. MTE


    Exercise of an OTM option doesn't make economic sense so, no, an option will not be exercised if it is OTM. An ATM one or very close to ATM may be exercised due to the cost associated with exercise vs. selling.
  3. Tums


    consider yourself winning a lottery if your OTM is exercised.

    It does not happen all the time, but it is a gift.
  4. Thanks guys . . .

    so if the calls are OTM, let's say stock's trading at $40 and I have sold $50 calls. For whatever reason I get excercised(I read the post, doesn't happen), my broker goes out and buys the shares with the margin I have on deposit, and then goes to the option contract holder and sells the shares for $50, right? In this example I would have made $10 a share?
  5. Tums


    whether it is OTM, ATM, or ITM, as long as there is time premium in the option, there is little financial reasons to exercise it.
  6. Hi uncletom
    What tums means is if there is extrinsic (aka time) value left in the option then the buyer has little reason to exercise it since he would end up forfeiting the time value - why would he throw that money out the window? Btw the term used is assignment, i.e. you are 'assigned' if you are short and you 'exercise' if you are long. Your example is otherwise correct except that you are notified of your assignment first which gives you an opportunity to buy the stock yourself prior to the delivery date, otherwise the broker will do it for you.
    daddy's boy
  7. Maverick74


    This is not true. It seems as though very few people on this board understand options pricing. OTM options can and are exercised. The reason can be because a stock is slightly out of the money on expiration day and someone is taking a shot that there will be some news come Monday morning or over the weekend. They get the stock before the gap and assign it to the seller.

    Also, it seems as though very few people on here understand dividends and cost of carry. ITM calls will always be exercised when the dividend of a stock exceeds the juice on the call. It would NOT make economic sense to not exercise the call.

    And lastly, ITM puts will be exercised when the carry on the short stock exceeds the juice on the ITM put. Or to put it another way, if the interest received on the short stock is greater then the price of the same strike call, it will be exercised. Again, it would NOT make economic sense to not exercise.

    Just thought I would clear this up. As you were.
  8. BIG RISK .... You get peanuts for premium and all it takes is unexpected good news during the after market to wipe out 20+ such trades. And that 20+ could easily end up a lot higher.