American style options early exercise - realistic figure

[maxima120]

How in reality (I only traded europeans, very lightly) american style options exercised early?

Is it really happen automatically when underlying price touches strike price or is it conscious process invloving the trader decision (ie the trader must phone or post electronic instruction to exercise his options after the price has touched the strike)? How long it take normally? is it something what take hours or minutes or seconds?

 

[FSU]

Quote from maxima120:

How in reality (I only traded europeans, very lightly) american style options exercised early?

Is it really happen automatically when underlying price touches strike price or is it conscious process invloving the trader decision (ie the trader must phone or post electronic instruction to exercise his options after the price has touched the strike)? How long it take normally? is it something what take hours or minutes or seconds?

Equity call options will be exercised early generally just before the stock goes ex dividend. This "should" happen when the corresponding put (same strike as the call) is less then the price of the dividend, as you are essentially selling the put when you exercise the call.

Deeper in the money call options may also be exercised when a stock is hard to borrow.

Put options are generally not exercised early in this interest rate environment.

Index options (OEX) will be exercised early based on the movement of the futures after the 3:00 ct close untile the futures close at 3:15

In order to exercise the option, the holder must submit an exercise advice form, it is not done automatically before expiration.

 

[1245]

Quote from FSU:

Equity call options will be exercised early generally just before the stock goes ex dividend. This "should" happen when the corresponding put (same strike as the call) is less then the price of the dividend, as you are essentially selling the put when you exercise the call.

Deeper in the money call options may also be exercised when a stock is hard to borrow.

Put options are generally not exercised early in this interest rate environment.

Index options (OEX) will be exercised early based on the movement of the futures after the 3:00 ct close untile the futures close at 3:15

In order to exercise the option, the holder must submit an exercise advice form, it is not done automatically before expiration.

Well said, except I did not understand the OEX reasons for early exercise.

1245

 

[maxima120]

Quote from FSU:
Index options (OEX) will be exercised early based on the movement of the futures after the 3:00 ct close until the futures close at 3:15

If for example price touched your options you sold for a brief moment before 3:00.. And after 3:00 it moved away - you cannot be exercised. Is that right?

 

[cdcaveman]

Quote from maxima120:

If for example price touched your options you sold for a brief moment before 3:00.. And after 3:00 it moved away - you cannot be exercised. Is that right?

You aren't getting it.... its the choice of the rights holder... you can be excersized anytime.... its just not typically adventagous to

 

[atticus]

Quote from 1245:

Well said, except I did not understand the OEX reasons for early exercise.

1245

SET.

 

[FSU]

Quote from 1245:

Well said, except I did not understand the OEX reasons for early exercise.

1245

The OEX is really a unique animal. Not traded much these days, but if you are short options, it can be very risky.

Lets say you are long a 660 call. The index closes at 3:00ct at 680. During the day your call may trade with a small premium over the index value. At 3:00 it is always worth at least 20 (with the index at 680). OEX options are hedged with S&P futures (or SPY). So at 3:05, say the futures drop 10 points. During the day the call would also drop in price, but now it can't. The market maker can still effectively "sell" this call for 20 (by exercising) and buy the futures much lower, (even though the call is really "worth" much less.)

With and equity, this wouldn't be a big deal as if you were assigned, you would get stock. Here, since the index is cash settled, you are forced to "buy' the call for 20. This is one reason boxes in the OEX are worth a lot.

If you wish to exercise these options, the OCC must be notified before 320 ct. You can also find out the percent of each series that are assigned every day by about 6:30pm. Unlike other options, here you will be assigned the same percentage of your holdings as the entire open interest is assigned.

This also opens some opportunities as well. Since many customers must notify their clearing firms well before this deadline, their long positions may not be exercised, even if they should be. What a customer may do is "sell" an option to open and hope to skate the assignment. In the past example, the calls are worth 20 as that is parity. The should really be trading at say 15. If you offered these calls at 19.90 a market maker would buy them to make the sure .10, but if any skate through, you could make 4.90.

 

[maxima120]

5 star answer. Thanks very much

 

[sle]

Quote from 1245:
Well said, except I did not understand the OEX reasons for early exercise.

There is a wildcard option at the end of the expiration day.

 

[FSU]

Quote from sle:

There is a wildcard option at the end of the expiration day.

Not sure what you mean here. In the OEX, expiration day assignments are automatic as it is cash settled. ALL in the money options will be exercised and NO out of the moneys will.