opt789 Don't be sorry, we're all here to learn. Appreciate your feedback. Now, what practical method would you thus recommend, to a retail trader like myself and others, for determining the likelihood of early exercise? In practice this has never been an issue for me but I'm now curious to see what mechanism you use besides the simplistic one I mentioned earlier. Cheers db
db, I have watched so many people lose money trading I always feel obligated to tell retail option traders to not trade options until they really understand them and have the tools to properly value them. (Strike)*(Interest rate)/365*(days to expiration)-(dividends) Is this greater than the value of the corresponding Call? If so then it makes sense to exercise the Put. The key here is the interest rate: is the market maker net long or short the stock, does he have good or bad rates, is the stock hard to borrow, etc. But you are essentially correct for a rule of thumb, if there is time value left in the Put it is probably not going to be exercised. You are also correct that most retail traders would never use a deep in the money Put.
I trade a lot of DITM put spreads. For the short side I also look at open interest. I like to see at least 1,000 open interest and at least .40 ex value or more. Once open interest falls below 500 and ex value is .20 or less, look forward to an early exercise. Joe.
But if I am shorting put and buying call at the same time and with the same strike price would not that mean that I am paying the carry interest to market maker with my long call? Shouldn't the market maker be holding this short put/long call combo till the expiration even if the premium of the put goes down to 0 without him having it assigned? The cost of carry of the combo is call premium - put premium > 0. Shouldn't the cost of carry ( if it's positive as in the case of long call/short put combo) be predetermined all the way from the time the contract was bought until it's expiration? I believe that the only contracts that can be assigned early are the ones that have a negative time premium ( cost of carry ). For example short calls and short puts can be assigned early. Please advise whether long call/short put combos with positive time premium can be assigned early?
Only short positions can get assigned. Long positions are yours to exercise as you see fit. Theoretically, any short option can be assigned at any time, but in practice you will only be assigned when it is more profitable for the option holder to exercise than to sell.
You are making it too complicated. If you are short a Put, then you are short a Put, it does not matter what else you have, or when/why/how you did the trade. If the Put is an exercise candidate, per the formula I outlined, then you may be assigned. That is pretty much all there is to it.
I know that only short options can be assigned. I am looking at long call/short put combo as one contract ( one unbreakable entity ). ToS software knows to differentiate the open interest of the naked puts and the open interest of the combos as one whole entity. I believe market makers know also that they take other side of the combo contract as opposed to the naked put. So the question is whether they are going to assign the short put which is part of long call/short put combo that has a positive time premium as a whole ( as opposed to the naked put that has a negative time premium ).
u are mistaken in ur assumption. as others have said, u are short a put regardless if it is part of a combo. it is seen to the rest of the world as a naked put.