Explain how it went wrong?

[JSOP]

He was is a call spread... and got assigned in his short leg. So he is not covered.... he lost 63 cents... will only make that back when the stock drops, since he's short delta's now... short 100 (by being assigned in his call) and long 90ish...

I refer to the put, since you have to look at put call parity. During dividends, if you hold an ITM call... if you exercise, you get the dividend but give up the remaining time premium... which is the same time premium as in the put (P/C-parity). So in reverse, if you don't exercise... you lose the dividend but gain the remaining time premium.

In OP's case. Dividend was 73 cent. The 77,50 put is currently about 10 cents, which is the remaining time premium... so he's lost 63 cent due to him not exercising.

It's the way it works... I can explain further if you like.. but now I'm going home for dinner.

Hmmn that's an interesting thought. I never looked at the put-call parity that way in terms of time premium. I always thought time premium can change depending on how much delta and vega changes via how much the underlying moves before expiration.

Have a good dinner!

 

[res123]

So I ended up exercising the AAPL call (I only had one contract) which is what was left after the short was assigned. This way, I ended up with with my shares.

As I was assigned, I took a substantial paper loss as shares were taken away at 172.50 while AAPL was trading at 188 or thereabouts. Clearly, I need to expand the knowledge base.

 

[OptionsOptionsOptions]

As I was assigned, I took a substantial paper loss as shares were taken away at 172.50 while AAPL was trading at 188 or thereabouts.

But you got them back at $177.50, minus the credit for the spread.

Clearly, I need to expand the knowledge base.

• ITM debit and credit spreads are pointless.
• They should be closed once they reach ITM.

 

[JSOP]

So I ended up exercising the AAPL call (I only had one contract) which is what was left after the short was assigned. This way, I ended up with with my shares.

As I was assigned, I took a substantial paper loss as shares were taken away at 172.50 while AAPL was trading at 188 or thereabouts. Clearly, I need to expand the knowledge base.

Why exercising? You could've gotten more money by selling the call option. The ex-dividend date was May 11 which means that you wouldn't be getting the dividend anyway; it's spilt milk. If you exercised, you would've just gotten the intrinsic value, the diff. between the strike and the market value which is only $10.65 plus the cost of the option, it would've been even less. But if you have sold the option, the lowest bid for the option was $10.70.

Rule of Option buying: Unless there is dividend, selling back the option is ALWAYS more profitable than exercising, NEVER EVER NEVER exercise!!! This is why only 30% of the options are exercised.

Anyway, good luck with the AAPL shares.

 

[res123]

Frankly, the broker tried convincing me to sell the call option instead. The difference was $20 or so. I was already on the phone with them for a while and just lost my nerve.

Is it worth hedging Iron Condors? What if the underlying aggressively move upwards going way beyond the long call with let's say 14 days before expiration, and rolling up the tested side is just too expensive.

 

[OptionsOptionsOptions]

Is it worth hedging Iron Condors?

It already is hedged - with the long options.

What if the underlying aggressively move upwards going way beyond the long call with let's say 14 days before expiration, and rolling up the tested side is just too expensive.

You accept the loss and move on.

 

[JackRab]

@res123 you need to do some serious research into options theory, because by exercising you now lost some more money. It's not much, but there is still some time premium left in it... which you give up by exercising.

The only reason you got assigned in your short leg, was because Apple had it's ex-dividend date the next day (or a few days later). You should never exercise a call before expiry, unless it's because of dividend related matters... (or in short stock fees related matters, but I'm guessing that will go above your head at this moment in time).

 

[JackRab]

Hmmn that's an interesting thought. I never looked at the put-call parity that way in terms of time premium. I always thought time premium can change depending on how much delta and vega changes via how much the underlying moves before expiration.

Have a good dinner!

The time premium part of an option (as well as gamma/vega etc) is always the same for a call and put of the same maturity/strike. What you're mainly referring to is a change in TOTAL PREMIUM due to an underlying move, whereby the delta dictates most of the change. Since an ITM call has a higher delta than the equivalent OTM put, the call changes more... but that's only the intrinsic part. The extrinsic part, which I call the time premium, will be the same for both... and therefore change the same, whether it's because of IV shit or gamma.

When there's a dividend involved, the only thing that changes is potentially the maturity, since the call might have to be exercised in 5 days, while the same put has 14 days to go. But after the ex-div date, they will again have the same maturity... with both the same time premium/vega/gamma etc. Put/call parity dictates that.

example

Spot=100, r=0, maturity=30, D=1 (tomorrow).

98 put = 0.70, normally P/C-parity without dividend would mean the 98 call = 2+0.70=2.70
But it's worth less now, since it's priced based on future pricing... at expiry, the spot is 1 (dividend) lower than now if all stays equal.

Because of a dividend of 1 tomorrow, the 98 call has to potentially be exercised. So you have to look at what happens when you do and when you don't... find the break-even for yes/no exercise.

If you do exercise, after dividend that call is worth 2... since that's the intrinsic value.
If you don't exercise, after ex-date the call would be worth 1+0.70=1.70.
Exercising is worth more than not, so you should exercise.

The break even point is when the equivalent put value is equal to the dividend + any interest component (which is 0 in my example).

 

[raf_bcn]

Hi

An itm call will be early exercised the day before ex dividend if the dividend is more than his extrinsic value.

In OP's case. Dividend was 73 cent. The 77,50 put is currently about 10 cents, which is the remaining time premium... so he's lost 63 cent due to him not exercising.

And the OP will also have to pay the dividends for the short stock , as he was short the day before ex dividend date.

I never looked at the put-call parity that way in terms of time premium

yes, reading carefully @JackRab posts helps to open new option prespectives. thanks.

 

[JSOP]

Frankly, the broker tried convincing me to sell the call option instead. The difference was $20 or so. I was already on the phone with them for a while and just lost my nerve.

It's no problem, don't worry too much about it. But in the future when you are trading options, you always ALWAYS have to go in with a battle plan ready with all possible scenarios of what could happen and your corresponding strategies of how to handle each of them and then still have to come up with what to do on the spot when something unexpected happens. No. 1 no-no in option trading is losing nerves. Losing nerves when option trading could mean HUGE losses. I think option traders make the best war generals. LOL

Is it worth hedging Iron Condors? What if the underlying aggressively move upwards going way beyond the long call with let's say 14 days before expiration, and rolling up the tested side is just too expensive.

Iron Condors is already an option combo strategy with hedging built-in. The combo is consisted of both buying and selling of the options of the same side. So when you sell the call, you are at the same time long the call and the same thing for the put. If the underlying is aggressively moving upwards way beyond the long call then you would have no choice but close out the short call to avoid an assignment and then just let the long call ride in profit or you can wait to see if the underlying would come down but then you risk the stock being exercised early due to dividends like what happened to you. There is still 14 days before expiration, there is PLENTY of time premium, i.e. chance for it to rise up even more in value or come down or getting dividends. And this is just one scenario, there are other scenarios that you would need to look at and to see what happens to the options when underlying does this or that in relation to the strikes. And if you to puts as well, then you need to perform the same analysis for the put side as well.

What would help you to analyze is to draw what's called a "payoff diagram" where all the option or option combo value progression would be laid out given how the underlying moves in the future in relation to the strikes and the cost/premium of the options even including commissions. Knowing how to draw the payoff diagram and drawing it correctly for the option trades that you want to do is VERY IMPORTANT and it would really help you learn about option trading.