what exactly do you mean by "not knowing what your position would be"? dont you know if your option was excercised? does your broker call you and tell you. sorry i am new to this. what happens? if the option is excercised bascially you lose the premium income you initially collected correct? plus you would take an opposite position in the futures market right?
Pin risk occurs when the underlying expires right at your strike. Iow, you won't know til the next day (broker notifies you) whether you've been assigned since your short option is not itm or otm but it is right atm at expiry. This is different from the scenario where you have a short option that is otm - won't be exercised (assuming no dividend issues). If your short is itm by 0.05/0.01 (equity/index options) or more at expiry, then you will be automatically assigned. db
triggertrader, Exercise/assignment is not instantenous, so you don't find out about it until the next day, which means that you can face gap risk. I.e. you are assigned based on the settlement price on that day, but you don't find out about the assignment until the next day so you cannot make a trade until the next day and the price may gap against you before you have a chance to unwind the position. So, if you have a clearly ITM option then you can trade the underlying to offset the potential assignment and thus avoid the gap risk, but if the option is ATM then you don't know whether the option will be assigned or not hence you cannot make a "pre-emptive" trade in the underlying to lay off the gap risk. Whether you keep the premium or not is really irrelevant here. You need to look at your net P/L, but if you like to think of it this way then, yes, you do keep the premium either way, but you then may face a loss on the assignment. It's the same as car insurance. You pay the premium, which the insurance company keeps no matter what happens to your car, but at the same time it may face substantial outflow if you make a claim.
i see...so when you say a preemtive trade in the underlying meaning that you would in advance go long the underlying market before the excercise so that the inevitable short position you will take when its excersied will be offset as soon as it is established? (in the case of selling a call)
speaking of expiration. i have a question. in reference to futures options where do i find the exact expiration dates for any given commodity? i have looked at the exchange websites but they dont actually tell you. do they all have diffrent expiration dates? do they all expire at the same time? thanks.
Each commodity has dramatically different expiration (aka "last trade") dates, and some are entirely confusing (April Crude just closed out, for example). CME's product calendar is here: http://www.cme.com/clearing/clr/product_calendar.html For example, the last trade date for the ES April e-mini option series is 4/20/07. Beware when trading physical commodities (anything that doesn't settle into cash)--expiration of options is generally at an earlier time than the expiration of futures. Keep on the lookout for last trade date, first notice date, and first position date.
thanks for the link but it didnt help at all. i am looking at comex silver and nybot coffee options and i cant find the expiration dates for them at all. do you think my broker would know them off hand? i have a discount broker and i dont think they r going to give me all this info. why cant the exchanges be mroe clear about the expirations on their options? it should be pretty simple.