Assignment Risks of Writing ITM options

[taowave]

You should understand the relationship between carry cost/stock rebates vs div rate vs the "emedded" short option(in your case,the corresponding call of the short put)

If you are going to get assigned,it's typically a dividend play.

 

[Robert Morse]

I think I'm not alone in that I no longer understand your questions. Can you start over and ask a simple question about being short puts.

@Robert Morse and @ondafringe, I did not say that I mean naked put.
See this posting. IMO in this context it does not make a difference whether it's a naked put or a covered put,
and I mean covered put (aka cash-secured put).

Ok, "buy-write" means a covered call; so another unnecessary/confusing term.

 

[earth_imperator]

You should understand the relationship between carry cost/stock rebates vs div rate vs the "emedded" short option(in your case,the corresponding call of the short put)

Really? What is stock rebate?

If you are going to get assigned,it's typically a dividend play.

But only for ShortCall, isn't it?

 

[earth_imperator]

I think I'm not alone in that I no longer understand your questions. Can you start over and ask a simple question about being short puts.

Robert, it does not matter anymore, b/c the problem has already been solved! Thx.

 

[earth_imperator]

I'm not an options trader, but I have been digging around trying to learn what I can. This appears to be a good opportunity for me to risk embarrassing myself in public. Plus, I can gage how my learning process is coming along.

Welcome on board!

...
So had someone bought your 416 ITM Put and immediately exercised, they would be short 100 shares of SPY at 416 and be up the intrinsic value of $233. But since they paid $1,228 for your Put, they would actually lose the extrinsic value and be down $995 on the trade. No one is likely to do that, so your assignment risk is virtually non-existent.
...

Just my saying: ITM, or even deep ITM, does not mean early assignment risk.

If that's not exactly correct, I hope I'm at least close. if not, maybe they'll have mercy on me.... and maybe even school me on my mistake(s). lol

I'm a learner myself, so other experts can surely judge it better than me, but I think your example, analysis and expertise is very correct, IMHO. Thx.

 

[zdreg]

A covered put is not a cash secured put.
A covered put is short stock and short put.

Any option that is deep in the money is subject to early exercise by the buyer if the market price of the option is less than the real value of the option. e.g put strike price is 50 current price of stock is 20. The put is worth 30. The option hardly trades The market for option is bid at 28. Rather than selling the put at 28 netting 28 minus the cost of the put, the buyer exercises the put at 50. he sells you stock at 50 and buys stock immediately at 20 netting 30 minus the cost of buying the put.

 

[earth_imperator]

A covered put is not a cash secured put.
A covered put is short stock and short put.

Right, thx for the correction.
I mean CashSecured Put, b/c this is easier to trade than Covered Put and Covered Call.

 

[donnap]

The easiest way to determine assignment risk is to calculate the European style value of the option.

All cost of carry inputs should be included such as interest rates, pending divs, and borrow costs.

If the European value is below parity, then there's a high probability that the option will be exercised.

Using this method, as long as the option shows some extrinsic value then the probability is low, because the holder is better off selling the option.

But there are exceptions to this general rule. Since the holder has the right to exercise there are no guarantees.

 

[taowave]

Nope..Think about it..You sell an ATM put on a stock with a high dividend yield going ex div 2 weeks before expiration..

The stock tanks and drops 20 percent..

The OTM call on the same line and expiry of your short put is now offered at .01..

Let's assume that I am long the put you sold and Delta hedged it and am now in the synthetic call,I.e. Long stock/Long put..

Hypothetically,if the carry on the long stock is ten cents after going ex,what do you think the holder of the synthetic call does???

Really? What is stock rebate?


But only for ShortCall, isn't it?

 

[earth_imperator]

Any option that is deep in the money is subject to early exercise by the buyer if the market price of the option is less than the real value of the option. e.g put strike price is 50 current price of stock is 20. The put is worth 30. The option hardly trades The market for option is bid at 28. Rather than selling the put at 28 netting 28 minus the cost of the put, the buyer exercises the put at 50. he sells you stock at 50 and buys stock immediately at 20 netting 30 minus the cost of buying the put.

This sounds too good to be true, IMO.
Anyone can confirm the above claim of making such a big profit by exercising?
Can one give a real-word example using for example options data from YahooFinance?

Btw, later on Sat I'll try to implement this into my option scanner and see whether it finds any such, IMO, arbitrage.