Can anyone explain?

[clancyfish]

Hi,

I have some wbc shares that I bought ages ago and having been steadily writing options against each month. I'm happy...it gives me some pocket money and I make sure that my strike price will give me a tidy profit.

I logged on to Etrade Friday afternoon to find that the option has been exercised at what could only be a minimal gain if not a strike even for the buyer when considering all the brokerage costs. They would have bought my option for $340 and the strike price was $21.50 with wbc being at around $21.93 on Friday. Am I missing something here? Why would they exercise this option?

Thanks
befuddled clancyfish

 

[Nick Radge]

If it was a July option then its automatic exercise. Expiry was Thursday. If it was August, then yeah...beats me.

 

[sails]

Perhaps they wanted to own the shares...

Perhaps they couldn't get a fair price to sell the calls by the time trading closed on expiry day, so they elected to exercise to get their 43c worth of value...

It could have been a market maker on the other side of your trade, and they never leave their money on the table...

A lot of brokers have automatic exercise for in-the-money options, so it's a case of both option holders and sellers beware on expiry day!

I agree with Nick that if it was August calls it doesn't make sense as someone has given away a lot of premium.

 

[wayneL]

Hi,

I have some wbc shares that I bought ages ago and having been steadily writing options against each month. I'm happy...it gives me some pocket money and I make sure that my strike price will give me a tidy profit.

I logged on to Etrade Friday afternoon to find that the option has been exercised at what could only be a minimal gain if not a strike even for the buyer when considering all the brokerage costs. They would have bought my option for $340 and the strike price was $21.50 with wbc being at around $21.93 on Friday. Am I missing something here? Why would they exercise this option?

Thanks
befuddled clancyfish

In all probability, the person who exercized their option, wasn't the person who originally bought your option. It is all random, it could have been an entirely different person; someone who bought at a completely different time and a completely different price.

The guy who bought your option could have traded out of it. But as a general rule, as Nick says, if the option is ITM at expiry, you will almost certainly be assigned.

If you don't want to be assigned, you must close out the option before expiry. This way, you won't have a CGT event and you will still have captured most of the extrinsic value of the option.

Cheers

 

[clancyfish]

thanks, I'll think I'll make a point of closing out the option in future.

clancyfish

 

[Bingo]

Also note that market makers often pay little or even no brokerage. You will nearly always be assigned if they in the money.