# Assigned on OTM options



## Sharkman (29 August 2014)

this is the first time i've ever had this happen in 5 or 6 years of options trading.

i was short the aug 63 puts on RIO. it closed yest at 63.06 and never traded below that level all day. yes, i know that was cutting it a bit thin, but i didn't want to give up that final day theta and the bid/ask was stupidly wide for most of the day. it did close above 63 in any case.

so i was a bit shocked this morning to see the RIO options had been assigned. now i have to slap a collar around it quickly, i don't really want the position at this point.

not sure why this would happen? i always thought exercise notices have to be submitted to the OCH within an hour or so of the closing auction finishing. was the price action in the europe timezone sufficient in that one hour after ASX close such that a trader who was long the puts could determine that the stock was likely to fall today, and send the exercise notice in to the OCH? i don't trade international markets so i don't really know.

what raised my eyebrows was the fact that i had gotten assigned on 2 other (in the money) aug short option positions, but the broker's assignment notice (in my account management screen) for the RIO puts came in 6 hours after the other two. should i be suspicious of the broker pulling a swifty? ie. it's held in street name, so did they assign me against their own prop position after europe had been in session a few hours and it was looking quite likely the stock would fall today - even though they purportedly don't do this? unlikely i would have thought, as surely it would breach regulatory requirements. is there some other explanation? has anyone else had this happen before? wondering whether this is a normal occurrence, since as i said, i've never had this happen before in 5-6 years of trading ASX options.


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## Value Collector (29 August 2014)

Sharkman said:


> this is the first time i've ever had this happen in 5 or 6 years of options trading.
> 
> i was short the aug 63 puts on RIO. it closed yest at 63.06 and never traded below that level all day. yes, i know that was cutting it a bit thin, but i didn't want to give up that final day theta and the bid/ask was stupidly wide for most of the day. it did close above 63 in any case.
> 
> ...




maybe buying options that were slightly out of the money was a way for someone to sell a large parcel of shares when the market depth wasn't allowing it without making the share price fall, he/she may have been able to off load a bunch of shares onto you guys at $63, where if he tried to sell into the market he may not have gotten $63 and now you have to deal with the market depth issue instead of him. 

who knows, could be any reason I guess.


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## pixel (29 August 2014)

That's always the risk with options: The holder of an option has *the right to exercise*. One normally would not expect any rational person to make use of that right when the market trades at a more favourable level; but volume and spread, even brokerage consideration, will sometimes overrule what seems to the casual observer "rational".

Small consolation: RIO is trading only a small margin below your Put price, so you may still get away with a small profit, depending on the size of the premium you raised when you sold those Puts.


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## skc (29 August 2014)

Sharkman said:


> not sure why this would happen? i always thought exercise notices have to be submitted to the OCH within an hour or so of the closing auction finishing. was the price action in the europe timezone sufficient in that one hour after ASX close such that a trader who was long the puts could determine that the stock was likely to fall today, and send the exercise notice in to the OCH? i don't trade international markets so i don't really know.




London opens at 8am local time, or around 5pm our time. It appeared that RIO gapped down 1.72% on open in London, which is quite similar to how much RIO fell on the ASX yesterday. So on the surface there doesn't seem to be a huge opportunity to exercise the put at your expense within the hour of the ASX closing auction.


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## Sharkman (29 August 2014)

good point - could have been for liquidity reasons.

i know the option buyer has the right to exercise, but i was surprised that all 20 of my contracts were assigned, as i thought that would have to mean that a large % of the holders of those contracts had opted to exercise OTM.

but having re-read the documentation on how the IB assignment lottery is conducted i can now see how it happened. i initially thought all the short contracts were put into a virtual hat and drawn out one by one until all the assignment notices had been met. as i would have expected the majority of the open interest to have been abandoned, i thought the odds of all 20 of mine being hit were slim.

but the lottery is in fact sequential with each client's holding all lined up consecutively, a starting point in the sequence is picked and it goes thru the sequence until all the notices are met. so i was just unlucky to have my entire holding fall within the sequence picked.

took in 65c of premium originally, so overall it's a small profit at this point with the stock around 62.50. just a tad annoyed i didn't get to pocket the whole premium, which i had thought was in the bag when i shut down my terminal yesterday


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## cutz (30 August 2014)

Sharkman said:


> i know the option buyer has the right to exercise, but i was surprised that all 20 of my contracts were assigned, as i thought that would have to mean that a large % of the holders of those contracts had opted to exercise OTM




Thanks for sharing mate, I too would have thought it was in the bag !

Yeah, it appears many puts were exercised at the 63.00/63.01 strike, 4094 contracts, around 25.79 million worth of face value. 

Do you recall the open interest at that level the day before ?


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## Sharkman (2 September 2014)

cutz said:


> Thanks for sharing mate, I too would have thought it was in the bag !
> 
> Yeah, it appears many puts were exercised at the 63.00/63.01 strike, 4094 contracts, around 25.79 million worth of face value.
> 
> Do you recall the open interest at that level the day before ?




i can't remember the exact open interest at the time, but i don't recall any contracts in the entire chain having significantly more than that 4094 figure you mentioned. so that would strongly support value collector's theory that it was probably an insto or fund looking to dump a large holding quickly. i guess i didn't unluckily draw the short straw after all, a lot of others would have been assigned too.

which could explain why the stock dropped to 62 just after the open on fri - others weren't expecting to have to take delivery either, and looked to offload their stock - then it rapidly recovered to around 62.50 and hovered around there for the rest of the day.

where did you find out how many options were exercised? is it freely available from the ASX or do you need to subscribe to a certain level of market data to get it? i'm still cheaping out by trading thru IB with no market data subscription and using a dormant commsec account to get the live prices.


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## sails (2 September 2014)

Sharkman said:


> i can't remember the exact open interest at the time, but i don't recall any contracts in the entire chain having significantly more than that 4094 figure you mentioned. so that would strongly support value collector's theory that it was probably an insto or fund looking to dump a large holding quickly. i guess i didn't unluckily draw the short straw after all, a lot of others would have been assigned too.
> 
> which could explain why the stock dropped to 62 just after the open on fri - others weren't expecting to have to take delivery either, and looked to offload their stock - then it rapidly recovered to around 62.50 and hovered around there for the rest of the day.
> 
> where did you find out how many options were exercised? is it freely available from the ASX or do you need to subscribe to a certain level of market data to get it? i'm still cheaping out by trading thru IB with no market data subscription and using a dormant commsec account to get the live prices.




Sharkman,   I have used the Trading Room  - it's free but needs registration to view the Course of Sales. Similar to Webiress, it gives info on how many options were exercised and at which strike but don't think you can get historical data.  These pre-market trades are usually put up around 7am.  As I'm trading index options now, I haven't checked for a while, so hopefully it hasn't changed. 

http://www.tradingroom.com.au/apps/qt/quote.ac?code=RIO&section=summary&submit=


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## sails (2 September 2014)

I have seen some get badly hurt with leaving short options to expire.  Long time ago now, and I think it might have been RIO on one occasion where earnings were released just after the market closed on expiry day and it shot up causing assignment to some holding short calls that were otm when the options market closed for trading.  I think long option holders have some time after the market closes to request exercise. 

On another brutal day one share (can't remember which one now but it was a popular one for shorting calls) received a surprise take-over offer after the market closed...


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## Sharkman (2 September 2014)

sails said:


> Sharkman,   I have used the Trading Room  - it's free but needs registration to view the Course of Sales. Similar to Webiress, it gives info on how many options were exercised and at which strike but don't think you can get historical data.  These pre-market trades are usually put up around 7am.  As I'm trading index options now, I haven't checked for a while, so hopefully it hasn't changed.
> 
> http://www.tradingroom.com.au/apps/qt/quote.ac?code=RIO&section=summary&submit=




thanks for the tip. i do occasionally use tradingroom to get info on stocks, but i didn't know that the course of sales has option exercise info behind it. i'll register and take a look.



sails said:


> I have seen some get badly hurt with leaving short options to expire.  Long time ago now, and I think it might have been RIO on one occasion where earnings were released just after the market closed on expiry day and it shot up causing assignment to some holding short calls that were otm when the options market closed for trading.  I think long option holders have some time after the market closes to request exercise.
> 
> On another brutal day one share (can't remember which one now but it was a popular one for shorting calls) received a surprise take-over offer after the market closed...




my understanding is that the OCH requires the exercise notice within the hour after the closing auction is done.  which would mean 1710 AEST. that's why i was wondering if it was possible that someone could have decided that based on early London trading, RIO would open down on friday, and sent in the exercise notice just before the deadline.

agreed, those sorts of events are risks of letting it run to expiry. but closing out every marginally OTM short option right before close on expiry day will also add up. i can't remember the exact numbers but even when the stock was around 63.40 with a couple of hours or so to expiry, i seem to recall the ask on the 63 puts was about 0.15, so i scotched the idea of closing out.


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## cutz (3 September 2014)

Hey Sharkman,

I use Webiress plugged into excel to get the info. You mention you have a comsec account, if you check the price quote today on BHP ( it went ex div today ) via comsec and go to the course of sales tab then click on view all trades you can see all the BHP calls that were  exercised yesterday with the condition code of "EC"


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## Sharkman (4 September 2014)

cutz said:


> Hey Sharkman,
> 
> I use Webiress plugged into excel to get the info. You mention you have a comsec account, if you check the price quote today on BHP ( it went ex div today ) via comsec and go to the course of sales tab then click on view all trades you can see all the BHP calls that were  exercised yesterday with the condition code of "EC"




you're right, don't know how i missed that, thanks!

too late to check the exercises at aug expiry now, as it seems to only retain the most recent session (though there do appear to be lots of early exercises of way ITM puts today), but i'll keep this in mind for the future


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