Quote from OddTrader:
* Only about 12% of options end up being exercised; the percentage hasn't varied much over the years. That does not mean that you can only be assigned on 12% of your short option, however. It means that, in general, option exercises are not that common.
A wrong conclusion from the data. The reason most options are not exercised is that the vast majority of ITM options are closed prior to expiration. Both buyers and sellers close positions. Thus, compared with the number of options that were sold during the lifetime of the option, the number of ITM options that are still open when expiration arrives is small. That's why the percentage of assignments is small. It's 100% of the final open interest, but that's small compared with the number of options that were open at one time.
The probability of being assigned early on a call options should be zero - unless there is a worthwhile dividend to collect.
* The majority of option exercises (and the corresponding assignments) take place as the option gets closer to expiration. Without getting into the math too much, it usually doesn't make sense to exercise an option, which has any time premium over intrinsic value. For most options, that doesn't occur until close to expiration.
Close but no cigar. Time premium may be zero on a call option, but there is a cost to carry - not to mention the risk of the stock tumbling - but the only reasons for exercising early are: stupidity and dividend.
A put is another story. Married put owners often exercise. Tired of paying the cost to carry, they exercise (in effect selling a call option for that cost of carry) and exit the position.
When a put moves deep ITM and the corresponding call is offered at 5 cents, the probability of an early exercsie is high.
* In general terms, a put which goes in-the-money is more likely to be exercised than a call which goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. People are more likely to exercise options if it means they can receive cash sooner. The opposite is true for calls, where exercise means you have to pay cash sooner.
The bottom line is that you really don't have any sure-fire way to predict when you will be assigned on a short option position; it can happen any day the stock market is open for trading.
Agree with the bottom line.
Mark
