Hi all, I sell OTM options (puts and calls) on the SPY every month. I was reading about an advantage to trading SPX options in that European style options are not exercised/assigned before expiry. With American style options such as those on the SPY, can OTM options also be assigned/exercised early? Has anyone had any such experience? Thanks.
If you mean that European options might allow you to sit through a move against you since they can't be exercised, I don't see what advantage that is...you're still in a losing trade on a naked short. If you mean can someone exercise an OTM before expiration when it's still OTM, I see that as a "gift" since you can immediately cover at the market (only time I can think of exercising an OTM is if it's close to ATM and the dividend capture is worth it). Am I missing something?
Generally, nobody would exercise an OTM option (excluding instances where the option is just barely OTM), however weird things have happened.
The answer to your question is yes, OTM options can be exercised. The option owner has the right to exercise any time. I assume you are talking about a situation in which these OTM options move ITM. At that time, there is a possibility of early exercise. The are advantages to trading SPX options, but you must be very sure you understand the settlement process (not the exercise/assignment process) before trading even one contract. Mark