Put early exercise

Discussion in 'Options' started by shnauzopt, May 15, 2010.

  1. shnauzopt


    Hi all,

    I'd like to have more intuition about the put option early exercise.
    I think I understand that there are cases when it makes sense to exercise a put option - nonetheless I do see people exercising their puts and to me this is not optimal.

    So my understanding must be flawed - exercise makes sense only if the cash left (after the stock from the put exercise is bought back is liquidated) yields more than the time value of the option at exercise time

    Any hint really appreciated!

  2. I wouldn't worry about getting stock put to you early ...

    Most of the time I've seen it happen is when a position goes from far out of the money to deep in the money.

    Also its worth noting that getting stock put to you is entirely random - I knew 2 guys who had the same naked put position of 10 contracts and one of them had 1 contract and the other had 5 contracts put to him on the same day. The Options Clearing house "decides" and then sends the info to the broker.

    ps If you're asking cause you write naked puts - don't do it. Just use Covered Calls. While they have the same risk profile ... more retail investors get blown out cause of naked put writing then anything else ... talk to a customer service rep at any online broker and they will say the same thing.
  3. cigarno


    If you,as a NAKED put writer, have sufficient cash in your account to buy the underlying stock at the strike price, the position is considered a cash-covered put. Nothing to worry about.
  4. shnauzopt


    Thanks all for your answers.

    In the case I am interested about, there is usually some stocks to cover the put, so I am not worried about delivery, nor cash issues if there is a residual stock position left.
    And I know that the assignment process is random.

    What I would like to know is why the put was exercised in the first place - why the put buyer decides to do that. Very often this is not a good idea to me, specially now with very low interest rates.

    I (almost) never exercise any puts and at the same time I am regularly assigned. So I am wondering, what I am missing? Do you often (or sometimes) exercise your put and why?

    Thanks again
  5. The short answer is that puts are exercised to sell stock. Some examples:

    1) I own put protected stock and the options are near worthless (ATM at exp) or trading at parity. Two commission event to close each leg but no cost to exercise at my broker.

    2) Deep ITM vertical where I was assigned on the short leg. Exercise long leg to close (assuming no time premium remaining).

    3) I own ITM puts trading below parity (say $2 intrinsic but bid is $1.90). I buy shares and exercise puts (lose 1 commission, don't lose 10 cts)

    4) Pin risk of conversion at expiration. Exercise long put to get rid of stock, cover calls.

    5) User error :) Owner exercises by mistake.

  6. shnauzopt


    Ok thanks spindr0!
  7. I wish some of my DITM put options would get exercised early and stock put to my account. Although I suspect the odds are against it. :)