Selling naked puts question

Discussion in 'Options' started by coolguy17, Apr 30, 2007.

  1. coolguy17


    When I sell a naked put tomorrow on a stock reporting earnings and its in the money expiring in december and what are the chances of me being called out before december?
  2. Assignment on American style options can occur any time during the life of the option. However you are unlikely to be assigned early UNLESS the short option has little or no extrinsic value left. Dec options have a fair bit of time value so unless the stock rockets down (causing a mighty drop in your put's extrinsic premium as the option heads deeper itm - iow the extrinsic, aka time value, gets sucked right out of it) you should be ok, just monitor your extrinsic value.
    Obviously if you hold til expiry and aren't assigned prior and your option expires itm then your automatic assignment is guaranteed.
  3. coolguy17


    Thanks for the good answer.
  4. Here's my way of judging assignment risk:

    If (option bid + option strike) <= stock price, there's significant assignment risk.
  5. I'm sorry demoship but this doesn't make any sense. For example, using your formula, what if put strike is 40 and stock price is 47.65 and option bid is 1.20 and there is 25 days to expiry? Thus, with your formula, you get 41.20 which is less than 47.65 but I don't think anyone would likely assign you on an otm put that still has 1.20 extrinsic premium!
    Or how about call strike 45, bid 0.10 stock at 41. Thus you get 46.20 which is greater than 41 but highly likely to be assigned because there is virtually no extrinsic value left!

  6. Some would say that the delta of the option is the market's way of establishing the chances that the option will be itm at expiration.

    Hence, the odds that a dotm put with a delta of 10 would remain otm at expiration would be 1/10.

    But the markets are NOT closed systems in which one can easily establish probabilities. No one knows the future. No one.
  7. It is a matter of interest carry cost for the market maker. I assume that an ITM Put in Dec has little if any retail involvement. The market maker will buy stock as a hedge when you sell him the Put. If the interest cost (with dividends figured in if appropriate) of carrying the long stock exceeds the current price of the corresponding Call then he will exercise the option. Market makers have different interest levels depending on their size so you have to estimate their cost. If the stock is hard to borrow then things are a little more complicated.
  8. I second what opt789 posted. Early assignment will happen as soon as it is cheaper to replace the long with it's synthetic (wrt cost of carry etc).
  9. I'm sorry but you're all making it far too complicated :). An otm put, at expiry, will not be assigned. An itm put at expiry will be automatically assigned. Whether the option is assigned early depends on how much extrinsic value it has left plus there's an element of chance i.e. some buyer wants to exercise his long put early, for whatever reason, and your short put is the one that gets picked out of the hat. The amount of extrinsic value depends on the factors that make up the inputs to the pricing models. If short calls are involved and a dividend is coming up then early exercise is likely when the equivalent strike put has less extrinsic value than the amount of the dividend.
  10. I'm sorry, and I am not trying to be negative - just trying to help, but you are being far too simplistic. Options are based on math and you need to understand that math if you trade them. Market makers do not exercise "for whatever reason" they do it when, and exactly when, it make financial sense to do so as I explained in my post.

    If you do not understand my post, you may want to learn more about options before trading them. Are you aware that, depending on the stock and the strike, there are many ITM Puts that will be exercised as soon as you sell them?
    #10     May 1, 2007