Being exercised

[Magdoran]

Just a point. When the vertical spread is left till expirey, exercize/assignement is the only way to crystallyze your profit.

Market Makers do not put up prices before expirey. Any funny business will be quickly arbed away. However the the trading activity of traders exiting option positions prior to expiry may push prices around somewhat.

Option Pricing Models are notoriously innacurate in the days before expity and this is one of the reason why. Just do your summs at the time.

In my trading, anytime I can get more than 90% profit I will close or morph, irrespective of anything else.



Providing both happen at expiry, yes.

Cheers

I concur with this approach. Generally I’d prefer to wind out a debit spread before it gets too close to expiry (generally around the 30 days to expiry range), and certainly would consider exiting when at 90% profit, this makes good sense to me.

Wayne is quite right about the odd things that happen around expiry time – there is a lot of juggling to avoid “pin risk” for example where the underlying closes exactly at an exercise price on the expiry day.

Regards


Magdoran

 

[wayneL]

You must admit it introduces ambiguity and further clarification and explanation as to whether the position is long or short.

By the mere use of the correct term, "assigned" settles the matter conclusively.

As the Evil Empire is unaminously regarded as the centre of the universe (a situation that will change shortly I'm sure) and in fact, the inventor of the instrument, I believe we should at adhere to to the nomenclature as proposed by them.

As regards to my pedancy; The lack thereof has proved costly in times past, igniting a passion for all things pedantesque.

In fact the most fanatical pedagogue of all was The Original Count himself with regards to the exact time of sunrise.

The murderer of said Count, I'm sure was rather pedantic about the exact metalurgical composition of his bullets... and yes only a wooden stake would do.

 

[Magdoran]

As regards to my pedancy; The lack thereof has proved costly in times past, igniting a passion for all things pedantesque.

In fact the most fanatical pedagogue of all was The Original Count himself with regards to the exact time of sunrise.

The murderer of said Count, I'm sure was rather pedantic about the exact metalurgical composition of his bullets... and yes only a wooden stake would do.

I'm killing myself right now - ROTFLMAO!

Mag

 

[wayneL]

From my experience it usually only starts going up on exiry morning and if the shares haven't traded OTM before lunctime expect to be paying at least double the calculated price - at 5 mins to close it could be anything- you may as well forget it and go through the assignment.
John

John

Can you give an example of this? Doesn't have to be real, just so I can see what you mean.TIA

Cheers

 

[NettAssets]

Hi Wayne

LHG thursday
Trading range open 2.97 close 2.92 traded up to 2.98
from memory my backtester wont grab the series at the moment
LHGLS $3.00 put overnight fair value @ 2.97 .035
opened at .050 / .015
around noon trading at 2.95
.08 / .009
didn't watch the close on this one

from a similar experience .20 / .00 wouldn't suprise me.
John

 

[wayneL]

Hi Wayne

LHG thursday
Trading range open 2.97 close 2.92 traded up to 2.98
from memory my backtester wont grab the series at the moment
LHGLS $3.00 put overnight fair value @ 2.97 .035
opened at .050 / .015
around noon trading at 2.95
.08 / .009
didn't watch the close on this one

from a similar experience .20 / .00 wouldn't suprise me.
John

John

What would happen if you put a bid in a cent or two above intrinsic value?

 

[NettAssets]

I had a bid in at 4c that didn't get picked up.I traded at lunchtime and had to go right up to the ask It was touch and go at that point whether I would have been better off to short sell the shares and wait for assignment. There was too big a bundle for me to buy unfortunately
John

 

[Magdoran]

I'm just trying to understand how to defensively handle assignment...

From my calculations, the cost of brokerage of the underlying (2 sides) is going to be the big issue especially for the likes of CSL and MBL.

Is it possible (such as 2 days before expiry) once assigned to run out and buy an in/at the money option and exercise that on the same day and avoid any stock transactions (and stock brokerage)?

Once you are assigned the shares from a sold option position there is no way to avoid a share transfer.

and

Once you exercise your option in a long option position there is no way to avoid a share transfer - one transaction does not cancel out the other.

The only way to avoid a share transaction is to trade out of the option position before exercise happens.
That is to "buy to close" the equal number of contracts to offset a short option position or "sell to close" the equal number of contracts to offset a long option position.

John

The issue of fulfilling assignment needs to be clarified since there is some ambiguity in the mechanics described in both quotes.

For example let’s look at the mechanics involved with a bull call spread which is about to expire which has moved deep in the money.

The sold call is ITM and is exercised by the taker of the call. The writer of the sold call who established the bull call spread is now obliged to fulfil the contract by delivering (in Australia) 1000 shares per contract to the taker.

The writer with the bull call spread has several options open to fulfil the contract.

1) Inform their broker that they wish to exercise the bought call(s) and fulfil the requirements of the exercised (assigned) calls (which formerly comprised the sold call(s) position). The broker then delivers the stock to fulfil the contract, and awaits the delivery from exercising the bought call(s) to balance the transaction the next day. It is not necessary to actually buy or sell the stock, just exercise the bought call(s) – one transaction.

This may depend on individual brokers, but in my experience most brokers will allow you to exercise an ITM bought position in spreads like a bull call to satisfy a sold position that is exercised (assigned) - My full service broker certainly does.

You would only do this though if there was no time value in the bought call, and it was expedient to do so, and you wanted to wind out the position at that point.

2) Buy the required amount of shares in the market to fulfil the contract, and retain the long call(s) – assuming that the underlying will continue favourably, or that there is time value in the bought calls (in which case these could be sold separately at the most opportune time and not lose the time value which they would lose if they were exercised).

3) If the writer owned sufficient quantity of the underlying stock, they could inform their broker to take stock from their holdings to fulfil the contract if they wished.

4) If allowed (there can be some restrictions on this), the writer could if permitted by their broker and the exchange rules go short the underlying at the exercise price required by the taker, and inform their broker to match up the transaction. This requires that the broker would allow the issue of the same quantity of short stock to fulfil the contract. The writer’s account would then reflect the corresponding number or short shares transacted at the strike price.

So, yes it is possible to buy a call and exercise it on the day if you wished to fulfil an obligation, but you’d be paying for the option transaction, and the cost of exercising the call…

I hope this clears the matter up.


Regards


Magdoran

 

[NettAssets]

1) Inform their broker that they wish to exercise the bought call(s) and fulfil the requirements of the exercised (assigned) calls (which formerly comprised the sold call(s) position). The broker then delivers the stock to fulfil the contract, and awaits the delivery from exercising the bought call(s) to balance the transaction the next day. It is not necessary to actually buy or sell the stock, just exercise the bought call(s) – one transaction.

This may depend on individual brokers, but in my experience most brokers will allow you to exercise an ITM bought position in spreads like a bull call to satisfy a sold position that is exercised (assigned) - My full service broker certainly does.

Does this mean that you pay no commission for the share transfer Magdoran.
Are the costs for exercise the same as the costs for trading the option position.
I have not gone through exercise yet but my understanding is I have to pay both for the exercise instruction and the share transaction.
John

 

[wayneL]

1) Inform their broker that they wish to exercise the bought call(s) and fulfil the requirements of the exercised (assigned) calls (which formerly comprised the sold call(s) position). The broker then delivers the stock to fulfil the contract, and awaits the delivery from exercising the bought call(s) to balance the transaction the next day. It is not necessary to actually buy or sell the stock, just exercise the bought call(s) – one transaction.

This may depend on individual brokers, but in my experience most brokers will allow you to exercise an ITM bought position in spreads like a bull call to satisfy a sold position that is exercised (assigned) - My full service broker certainly does.

You would only do this though if there was no time value in the bought call, and it was expedient to do so, and you wanted to wind out the position at that point.

Great point Mag and one that deserves to be highlighted.

Amazingly, and stupifyingly, some brokers force the early exercise of the bought call when the short call has been assigned, even if there is substantial time value left. This explains the otherwise inexplicable early assignment of short calls

If this ever happens (the forced exercize of long calls), people should change their broker forthwith.

Cheers

 

[Magdoran]

Does this mean that you pay no commission for the share transfer Magdoran.
Are the costs for exercise the same as the costs for trading the option position.
I have not gone through exercise yet but my understanding is I have to pay both for the exercise instruction and the share transaction.
John

Hello John,


Most brokers have a set of scheduled fees where options transactions and exercise fees are usually treated as different categories – the cost to exercise is usually much more expensive than an options (and often a share) transaction.

But this differs from broker to broker. Some may well charge differently - I use several different brokers in Australia, and they all have similar mechanics as described, so I have not encountered the approach you are describing, but it could be the structure of your current broker.

Using the bull call example above (based on the arrangement that I have with my brokers) you shouldn’t be charged for being assigned, but you would be charged to exercise the bought call as one transaction, not two.

If you bought shares though, you’d be charged for this, and if you sold your bought call separately, this would be treated as a separate transaction.

So, no, generally the cost of exercise is usually dearer than an options transaction, and yes, if you are able to use this kind of transaction you wouldn’t pay commission for the share transaction, but you should clarify this with your broker.


Regards


Magdoran

 

[Magdoran]

Great point Mag and one that deserves to be highlighted.

Amazingly, and stupifyingly, some brokers force the early exercise of the bought call when the short call has been assigned, even if there is substantial time value left. This explains the otherwise inexplicable early assignment of short calls

If this ever happens (the forced exercize of long calls), people should change their broker forthwith.

Cheers

Hello Wayne,


Thanks…


Re forced exercise - That’s pretty poor if you are forced to exercise a bought call prematurely without being given the option to retain the value if possible…

With my current brokers, my understanding is that you are given the options outlined above, but must conclude the transaction by a certain time of day if your account balance or share balance is insufficient to cover the transaction, but you are also given the opportunity to increase your account balance as collateral if required (usually if assigned with a sold put) or purchase the stock in the case of sold calls.

If I had time value left, I’d certainly look to finding the best way to realise this value, or retain it…

I usually deal with bull puts though where your account suddenly has a whole lot of shares added to it when the sold put is assigned – which can be interesting depending on your account size, and the number of contracts involved.

One day I logged on to find a big red number in my cash balance, and a wad of shares in my position area. I’d stuffed up a position, and sold the wrong month by accident, and got assigned. So, I waited to wind out the position by selling the shares later that day…

It cost me about $500 USD (not huge, but irritating to throw money away via error) at the time though because the stock had moved against me overnight, and the bought put didn’t appreciate because it was so far OTM with not enough time value I couldn’t wind it out for a credit… learnt my lesson to pay attention to the expiry month (sometimes I didn’t know what day it is when trading the US because you become nocturnal like Wayne – what day is it today “Dracula”? Hahahaha…)

So, I agree, if your broker forces the exercise of calls without giving the above options, I’d be looking for a new broker, and cancelling my account (I have actually done this in the past, and won’t stand for any substandard treatment).


Regards


Magdoran

 

[rhmt01]

Thanks for all that...

I've done a fair few things today.

Spoke to a few brokers (since I'm currently in the middle of brokers - I haven't signed my JDV stuff so I won't be with avcol past the end of September). Based on this discussion and the attitude of the broker, I have chosen to move to Norris Smith at the end of the month.

He gave me a few choices.

1. I could cop the fail fee every day I'm out, being the higher of $50 or 0.1%. He doesn't mind as long as hes kept informed (unlike others that would threaten you with closing your account for continual fails). Thats $50 per contract on CSL or $60 or $70 on an MBL or RIO.

2. Settle the assignment though my BT margin loan account. OK for smaller options, but the fail fee option doesn't require moving 25%-30% of the assignment value (at $15-$25,000 for CSL/MBL/RIO)... so about $13/per day/per $50,000. Over a weekend the fail fee is roughly the same without the money transfer madness!

3. Have the cash ready on assignment day.

He was very helpful and spoke about my other concerns (such as the bad attitude of some brokers when you ask them to move the spread etc). I think I have found a full-service non advisory broker (if there is such a thing).

After all this I am no longer in the dark about the concept of assignment and actually looking forward to my first one (hopefully on a bull credit spread).

Thanks to all.