Perplexed on KKD

Discussion in 'Options' started by da-net, Jun 4, 2005.

  1. da-net


    Hi To ALL!

    Perhaps you have an insight that I have not considered on a recent exercise on KKD My trades were a call ratio credit backspread. Here is how it goes:

    On one leg I sold some KKD Jan 05 5Calls a few months ago and someone just exercised 3 contracts. They exercised these contracts while there was about $100.00 time value in the contracts which they left on the table.

    My question...Why would someone do this?

    1)..If they thought the stock was going to continue to climb there was plenty of time left in the options and the options have lower risk than owning the stock. Why would they not have sold the options and captured the TV? Plus the costs of double transactions if they wanted to exercise then sell.

    2).. If they thought the stock was going to stay flat they have a time cushion from the TV and lower risk with options

    3).. If they thought the stock was going to go down...Why would they call it to them. Again increased risk.

    Perhaps some of you have some thoughts that I am missing or not thinking of.
  2. nkhoi

    nkhoi Moderator

    maybe he just made a beginner mistake.
  3. MTE


    Unfortunately, there's no way of knowing what the other person was thinking or doing when he/she exercised those calls early and handed over some of his/her money to you.

    It is the option's holder right to exercise those options at any time and for whatever reason, no matter how irrational it may seem.

    Maybe it was a beginner's mistake or maybe it was done for some specific reason.
  4. Trajan


    I presume these are 06 or 07 and not 05? If you say they had a dollar of time premium, these look like the 07s. The calls are trading around parity while the puts are juiced up a bit. I imagine this stock is hard to borrow. I guess you are looking at the put when you say they have the time premium?

    What probably happened is that they sold stock and exercise the calls for delivery.
  5. da-net


    pardon my year mistake...yes they were KKD Jan 06 5Calls

    Thank You for the insight of possible short sale covering. I missed that in my thinking and trying to understand the counter traders reasoning can help us all become better traders.

    By the way, I subscribe to Ken Treister "Put & Call Tactician" and his latest email is suggesting a long trade in KKD and since I've been in the trade for several months now, here is his trade recommendation as a way of saying thank you for your input!

    Buy KRISPY KREME (KKD) Aug 7.5 Call options at 1.25 or lower (Stock
    Price = 8.4). After entry, take profits if the stock price hits 9.3
    (option price = 2.0). Exit if the stock price closes below 7.9
    (option price = 0.9).

    Probability of hitting Profit Goal 29%: Probability of hitting Stop Loss 55%

    Implied Volatility 49%: Delta .731: Rating 82: Expected Value ($1.7)