Early assignment and pin risk basic questions:

[CyJackX]

If you choose to exercise an option early for whatever reason, is it instantaneous or settled overnight? For example, if the option was very illiquid but the underlying wasn't, and it was DITM, would it be possible to exercise and immediately close the stock position?

How is it decided who gets assigned and who doesn't if you have a short option? Completely random? Preference for institutions or the composition of a given portfolio?

 

[JSOP]

If you choose to exercise an option early for whatever reason, is it instantaneous or settled overnight? For example, if the option was very illiquid but the underlying wasn't, and it was DITM, would it be possible to exercise and immediately close the stock position?

How is it decided who gets assigned and who doesn't if you have a short option? Completely random? Preference for institutions or the composition of a given portfolio?

Exactly when and what time you will open or close a stock position from exercising your option is something you need to confirm with your broker. As far as I know, different brokers have different policies.

Who gets assigned or not is completely random, nothing to do with retail or institution, size of your position (although the bigger the size the higher the possibility I would think), the color of your eyes and etc. It IS entirely possible to be short an ITM option and not get assigned, hence the pin risk. More info. can be found by visiting the occ website https://www.optionseducation.org/ or contacting them directly. They are the ones that handle the clearing of option positions.

 

[ajacobson]

Exercise occurs after COB no matter what time the notice is received. If you want to stock trade many house will alow it with the ticket marked vs. exercise - some won't, but with free margin it is doable no matter what the broker is set up for. Some broker make you trade the stock manually which can get expensive so that part needs to be worked out with you broker. Assignment is random to the broker and then the firm can use random, lifo or fifo.

 

[.sigma]

1. Don’t trade illiquid options

2. Especially if it’s ITM, it might be difficult to get a fill. Settlement occurrs at the close? thus subject to PDT, and you can buy back your shares (if underlying is liquid as you mentioned)

 

[.sigma]

“The control of exercise is at the behest of the owner of the option. He is the one that determines when to exercise. To exercise a stock or index option, he must notify his broker by 4 P.M. Eastern time (or 5 P.M. on expiration Friday) that he wants to exercise his option. His broker then notifies the OCC, which is the central clearing house for all listed stock options. The OCC only deals with member firms (your brokerage firm, for example), so it does not “know” individual customers or individual accounts. The OCC then gathers all exercise notices that it received that night and randomly assigns them to member firms who are short the option series that have been exercised. The next morning, the member firm who was assigned then randomly picks out customer accounts that are short that particular option series and notifies those option writers that they have been assigned. This assignment notice should be received by the option writer well in advance of the opening of trading so he can plan any necessary trading action that the assignment notice might necessitate. The trades are deemed to have taken place on the day of the exercise; thus the person who is assigned doesn’t find out until a day after the trade has actually taken place.” - McMillan

 

[paladinhgwt]

If you choose to exercise an option early for whatever reason, is it instantaneous or settled overnight? For example, if the option was very illiquid but the underlying wasn't, and it was DITM, would it be possible to exercise and immediately close the stock position?

How is it decided who gets assigned and who doesn't if you have a short option? Completely random? Preference for institutions or the composition of a given portfolio?

Here is how it would work to do what you want to do.

Stock is at 100. You own a 50 call deep in the money little or no premium yet can't get filled.

You can sell short @ 100 and then exercise your call option same day (notify broker by 4pm). The next day your short will be covered when you buy or receive the shares at 50 by exercising your option.