What are the chances of being exercised

[profithunter]

I'm looking at writing some covered calls along with writing puts. I was wondering what the probability is of being exercised if the share price reaches the exercise price. Are you automatically exercised or is their a chance you wont be excercised at all?

thanks

 

[jkool]

While not having any practical experience with options my 2 cent would go like this:

In general I suppose that people investing in options are on average more knowledgeable than your average shareinvestor. So I would ask myself how often an average shareinvestor doesnt take an apparent, time limited profit and then I would expect a way lower number when it comes to options.

As far as the actual physical delivery of shares/goods on which you write the option goes - I assume that you can prevent that by closing your position by buying a corresponding option however you'd still ended up with a loss. Obviously the size of your loss to be determined by how much the market went against your shares/goods.

 

[Bingo]

I'm looking at writing some covered calls along with writing puts. I was wondering what the probability is of being exercised if the share price reaches the exercise price. Are you automatically exercised or is their a chance you wont be excercised at all?

thanks

If the option shares "in the money" at expiry and you do not close out as indicated by jkool then you will most certainly be exercised. It is NOT automatic, however, we are generally looking at a bunch of registered traders who make their living trading options, so the chance of it being missed is very low.

As I understand the exercise process options are exercised and allocated to the writers by some random means. You don't own or sell to a specific individual and so when exercises take place they need a way of allocating to a writer.

Another point is you need to be careful with ex dividend dates. If the ex dividend date is prior to the option expiry date then there may be exercises done to catch the dividend. In the case of put options they would wait until after the ex dividend date before exercising.

Bingo

 

[crashy]

Exercise of options often occurs when the stock is cum-div. This is because the option taker can exercise the call, buy the stock, receive the div and franking credit, and most likely sell the stock ex-div, making a tidy profit.

To avoid being exercised, make sure there is more time value than franking credits:

NABEG $27 call @ 50c, stock @ $27.20.....ie 30c time premium

NAB div 75c, franking credit 32c.

There is an easy 2c profit there, which may not cover brokerage so they may not get exercised.

Options will trade at effective ex-div price cum-div, but they cannot trade at less than intrinsic value.

 

[SuperTed]

OK..ive been exercised several times over the last few years.

From my experience you will not get exercised unless you are in the same month as expiry and the option is in the money.

Big stocks Ive always been exercised at expiry (if they didnt go in the previous weeks as above) if they are in the money **was hoping they missed me...but this never happens ;-(

There is to much money in an option to exercise it longer then a month out from expiry.....not to say that it cant happen but it would be very rare.

 

[baglimit]

i was gonna consult my local priest, then realised the spelling was wrong - sorry !!!

 

[SuperTed]

unless your jewish then your really in trouble ;-)