Can one leg of an IC get exercised?

wburt1948

wburt1948

Looking at buying an Iron Condor structured:
Buy 161.5 Put x6
Sell 162.5 Put x6
Sell 172.5 Call x6
Buy 173.5 Call x6

Has low volatility (about 17% overall), POP at 52%, P50 at 64% Delta +5.00
Max Gain +$246
Max Loss -$354
Underlying @ $167

Question I have is, can a buyer of the $162.5 x6 Put exercise that option independent of the other legs?
It would be a $97,500 hit. If so, I'm not certain if I would have the immediate capital to exercise my bought $172.5 call to cover.
Thanks everyone.
 
wburt1948 said:
Question I have is, can a buyer of the $162.5 x6 Put exercise that option independent of the other legs?
It would be a $97,500 hit. If so, I'm not certain if I would have the immediate capital to exercise my bought $172.5 call to cover.
Thanks everyone.
More...

When you write an option, you do not have any control over when or whether it gets exercised; theoretically, it could happen at any time. However, you'd also be long at a strike that's only $1 away - so exercising your long option would cap your max loss to $100 minus the premium paid per contract.

I'll also note that having that short exercised early isn't something to worry about since it would put all that time value in your pocket. Score!... but that's why early exercise doesn't happen too often. Buyers aren't too likely to give away all that money for nothing.

P.S. Think about the exercise process: say you get assigned stock, so you owe $16250 per contract. Then you exercise your long, meaning you are owed $16150 per contract (for the stock that you got assigned but will now assign to that seller.) So the stock op is a wash - you take it with one hand and give it away with the other. Ignoring premium for the moment... how much have you actually lost?
 
Last edited:
Thank you for your reply.
Exercising my long option would require $96,900 ($161.5 x 600), which I do not have available. So in this scenario, it looks like this transaction should be avoided knowing that although it's rare for a put purchased to get exercised early, the buyer could theoretically do so and I would not be in a position to buy my option to cover the 600 shares that the $162.50 x6 put buyer is buying. Or am I confused? Always a possibility.
 
wburt1948 said:
Thank you for your reply.
Exercising my long option would require $96,900 ($161.5 x 600), which I do not have available. So in this scenario, it looks like this transaction should be avoided knowing that although it's rare for a put purchased to get exercised early, the buyer could theoretically do so and I would not be in a position to buy my option to cover the 600 shares that the $162.50 x6 put buyer is buying. Or am I confused? Always a possibility.
More...

See my P.S. above. :) Also note that you are not required to pop the cash on the barrelhead immediately; you usually have 24-48 hours to handle it after the assignment notice.
 
What dte and underlying? Depending on time and liquidity/bid-ask spread you might be in danger of assignment. If it's a hard to borrow stock and you can't exercise you long leg in a timeley fashion, you might be in for one hell of an interest rate (see NKLA thread in this subforum)
 
I am confused. Are you worried about the underlying settling between the strikes and not having enough capital? Or you're worried about an early assignment (which, all things considered, is great news for you)?
 
Atikon said:
What dte and underlying? Depending on time and liquidity/bid-ask spread you might be in danger of assignment. If it's a hard to borrow stock and you can't exercise you long leg in a timeley fashion, you might be in for one hell of an interest rate (see NKLA thread in this subforum)
More...
Thank you for your reply.
The underlying is $167 and DTE is 26 days but, most importantly, this trade has not been executed. I'm just getting advice regarding whether it's wise to do so. This IC has some decent liquidity but not exceptional. Given the POP at 52%, P50 at 64% Delta +5.00, it looks like a possibility but the overall cost of exercising was freaking me out. It's an EFT with $1.00 option price spreads (not rounded up/down by $5).
Thanks again.
 
Same Lazy Element said:
I am confused. Are you worried about the underlying settling between the strikes and not having enough capital? Or you're worried about an early assignment (which, all things considered, is great news for you)?
More...
Thank you for your reply. I am concerned about the total dollar cost associated with exercising. This EFT is just ever so slightly under its 52 week high of $168. 52 week range is $131-168.
Being an IC, I naturally want this to settle between the sold put and call. In this case between $162.50 and $172.50 in the next 26 days.
 
wburt1948 said:
Owe $162.50 x 600 = $97,500
Receive $161.50 x 600 = $96,900
I would lose $600 but likely still have the remaining 2 legs open.
How's my math?
;)
More...

Pretty good. :) Simpler: $100 per contract x 6 contracts, right? Now, subtract the premium you receive - $246 - and your max loss is $354. That's your total risk.

You did ask an important question, though; it's a good idea to understand the actual mechanics behind the exercise process. There's a bit of a catch in that you can get zapped if you hold all the way to expiration - e.g., if your long expires/is not tradeable by you, but your short gets exercised because some market maker saw the underlying drop after hours (which is why it's not a good idea to hold to expiration) - but in general, the risk you were concerned about doesn't exist... otherwise, no one with a small account would ever trade. Longs do provide solid protection.
 
You must log in or register to reply here.
Back
Top