American-style crimes: Can a bad broker steal your short position?

[Quanto]

1:
With a covered call the maximum profit is achieved if the stock closed at or above the short call on expiration.
If the call is exercised early I get the maximum profit without waiting for expiration.
Both positions are gone.
Why is that a problem?

The second part of your above statement is not true, ie. when early-assignment occurs.
Proof: https://optioncreator.com/stuisia
See the blue line for the shown day 7 (of 30) on the PnL chart of the CoveredCall.
The blue line each day moves up a little bit due to time-decay (ie. the CC earns value on each day passed, when S and IV are kept constant). The CoveredCall achieves its MaxProfit when the blue line finally reaches the orange line (expiry line). You can simulate this by changing the "Days from today" field (ie. just click on + and - to simulate it and see how the blue line moves).

Ie. if we assume that S and IV stay the same, then the CoveredCall achieves its MaxProfit only on the expiry date. But as demonstrated, if S rises then this process gets stopped early due to the fact that the ShortCall is of American-style --> cf. the PnL chart of it at https://optioncreator.com/stps818

Can you finally spot the problem and confirm it?

 

[Quanto]

2:
With a naked short call an early exercise allows you to lock in the desired premium decay without waiting for expiration.
You’ll have a loss to this point but your trade now has the same risk but greater profit potential than being short the call.
Why is this a problem?

Just do lock S and IV, and move t, and see that your above statement is not true,
b/c for this case, only at expiry the full credit gets earned.
And we should use this case (ie. treating S and IV as constant) primarily in such tests/considerations/simulations. Ie. that should be the basis for any further analysis.

 

[BKR88]

The second part of your above statement is not true, ie. when early-assignment occurs.
Proof: https://optioncreator.com/stuisia
See the blue line for the shown day 7 (of 30) on the PnL chart of the CoveredCall.
The blue line each day moves up a little bit due to time-decay (ie. the CC earns value on each day passed, when S and IV are kept constant). The CoveredCall achieves its MaxProfit when the blue line finally reaches the orange line (expiry line). You can simulate this by changing the "Days from today" field (ie. just click on + and - to simulate it and see how the blue line moves).

Ie. if we assume that S and IV stay the same, then the CoveredCall achieves its MaxProfit only on the expiry date. But as demonstrated, if S rises then this process gets stopped early due to the fact that the ShortCall is of American-style --> cf. the PnL chart of it at https://optioncreator.com/stps818

Can you finally spot the problem and confirm it?

I don't need to look at any graph to tell me when max profit occurs.
When early assignment happens, max profit is reached. Your equity position gets called away. The short call position is gone. The trade is CLOSED. No more pretty graphs to look at. No more positions to think about. IT'S OVER.

 

[BKR88]

Just do lock S and IV, and move t, and see that your above statement is not true,
b/c for this case, only at expiry the full credit gets earned.
And we should use this case (ie. treating S and IV as constant) in such tests/considerations/simulations.

With early assignment you achieve max time decay immediately. No need to wait until expiration. You have a new position .... the equity. Your option is GONE.

 

[Quanto]

I don't need to look at any graph to tell me when max profit occurs.
When early assignment happens, max profit is reached.

This is simply not true! Proof: see the PnL chart!
Or just prove it for any day when S and IV are the same like at entry.

Your equity position gets called away. The short call position is gone. The trade is CLOSED. No more pretty graphs to look at. No more positions to think about. IT'S OVER.

So, you close your eyes, deny the reality, b/c you don't like it
You lack to go into the detail of the problem.

 

[BKR88]

Covered Call Example:
SPY ... 473.18
Dec. 29 470 Call ... 5.00
Long 100 shares & short Dec. 470C
The call is now ITM so someone exercises the call against you.
Your shares get called away and the short call is removed as it was exercised.
YOU HAVE NO POSITION LEFT. How can you graph something that doesn't exist?
You can follow the graph as long as you have a position buy early exercise removes your positions.


Short Put Example:
SPY ... 473.18
Short Dec. 29 475 Put ... 3.32
Short put is ITM so someone exercises the put against you.
Now you're long 100 shares of SPY with unlimited profit potential.
The short 475 Put only had 3.32 more profit potential.

Spend more time figuring out what you have & don't have with an options assignment & less time looking at pretty graphs.
Has anyone agreed with your view in this thread so far? Is that maybe a clue?
This is options 101 stuff. I would leave the fancy stuff for Dest/NW/etc... if it was complicated.

 

[Quanto]

With early assignment you achieve max time decay immediately. No need to wait until expiration. You have a new position .... the equity. Your option is GONE.

Again, not true!
As the writer of the Call option, you have the obligation to deliver the stock when you get assigned, ie. when you get called...

 

[Quanto]

@BKR88, don't bring new trade examples, as it just distracts from the original problem, instead concentrate on the presented trades.

 

[Quanto]

Covered Call Example:
SPY ... 473.18
Dec. 29 470 Call ... 5.00
Long 100 shares & short Dec. 470C
The call is now ITM so someone exercises the call against you.
Your shares get called away and the short call is removed as it was exercised.
YOU HAVE NO POSITION LEFT. How can you graph something that doesn't exist?
You can follow the graph as long as you have a position buy early exercise removes your positions.

This is a useless example, as it shows nothing different from the previous example.
Here's its PnL chart for your enjoyment: https://optioncreator.com/stcwio4
Man, you risk $468.18 to make a max possible profit of only $1.82. That's even less than 0.4% Hmm..
Man, who does such silly trades? Oh, I forgot, some ET "experts" here...
But since this is a demonstration for an early-assignment, on day 5, when S and IV stay the same, you actually would make a profit of only $1.0, that's a mere 0.21% Of course multiply all $ by 100.

Spend more time figuring out what you have & don't have with an options assignment & less time looking at pretty graphs.
Has anyone agreed with your view in this thread so far? Is that maybe a clue?
This is options 101 stuff. I would leave the fancy stuff for Dest/NW/etc... if it was complicated.

Nope, this is a case for true option experts, quants, mathematicians, researchers, not for amateurs like you...

 

[TheDawn]

It appears brokers are supposed to make their policy for options exercise assignment available (at least to FINRA), and this policy is supposed to be first-in, first-out or a random method.

Always thought it's random. Never knew it could be by first-in, first-out.