Option assignment At The Money

M

Mugono

Hi all

I would first like to thank many ETers on here who have made a significant impression on my approach to risk management during my foray into the options space through their numerous posts over the years (RiskArb/Atticus , Maverick 77 etc) as well as the very many intelligent posts by many many others.

I had a quick question please.

I recently had on a 35.5/37/38.5 iron fly on Twitter (TWTR) that had a last trade date of Friday 5 June (yday) expiring today.

My broker (IB) confirmed that TWTR's official closing price as used by the OCC to assess whether puts/calls are in or out of the money was 37 (a strike pin) and so I had expected to not have to cover to remove my delta exposure.

I am therefore surprised to see that some of my options (puts) have been assigned despite the assignment/exercise rules being based on a $0.01 rule.

It is a simple case of selling the stock pre-market on Monday (annoyingly the stock last traded for 36.86 after hours so I may need to sell stock at a slight loss if it stays here or continues to 'tank') but I would be grateful if someone could explain why I was assigned even though the stock closed at the pin (short body) strike to the penny?

Many thanks in advance

Mudi
 
Mudi,

Even if the stock is a few pennies OTM, that is no guarantee. You have to be prepared for surprises like this or cover Friday near the close, the short pinned option. It's a cost of doing this type of trading.
 
Mugono said:
My broker (IB) confirmed that TWTR's official closing price as used by the OCC to assess whether puts/calls are in or out of the money was 37 (a strike pin) and so I had expected to not have to cover to remove my delta exposure.

I am therefore surprised to see that some of my options (puts) have been assigned despite the assignment/exercise rules being based on a $0.01 rule.
More...


From the CBOE site: Options Quick Facts - Expiration, Exercise and Assignment

What is "automatic exercise" of an option?

The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration, a procedure also referred to as "exercise by exception." Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. However, a specific brokerage firm's threshold for such automatic exercise may or may not be the same as OCC's.
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Keywords being "may or may not be"



:)
 
Many thanks OTM & rmorse for taking the time to read and respond to my post; much appreciated.

Understood and agreed.
 
On expiration Friday, owners of options have until 530pm(est) to decide whether to exercise them or not. If Twitter was trading at 36.86 after hours, anyone holding the 37 put could buy it there and then exercise the 37 put and lock in .14, much better than letting it expire worthless. I have found that it is usually worth it to cover your short options if you can cheaply if it looks like the stock will settle at or very near the strike price of your short option.
 
FSU said:
On expiration Friday, owners of options have until 530pm(est) to decide whether to exercise them or not. If Twitter was trading at 36.86 after hours, anyone holding the 37 put could buy it there and then exercise the 37 put and lock in .14, much better than letting it expire worthless. I have found that it is usually worth it to cover your short options if you can cheaply if it looks like the stock will settle at or very near the strike price of your short option.
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  • IB has it at 4:30 PM EST
  • BMO InvestorLine at 4:00 PM EST

TWTR's range from 4:00 PM to 4:30 PM on Friday was $36.9835 to $37.04. Which broker allows the 5:30 PM cut-off time?

:)
 
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rmorse said:
Mudi,

Even if the stock is a few pennies OTM, that is no guarantee. You have to be prepared for surprises like this or cover Friday near the close, the short pinned option. It's a cost of doing this type of trading.
More...
Perfect answer. I had cases that I had both PUT and Calls at say 27.5 strike price for a stock and the stock closed at 27.50 and some of the PUTs and Calls were assigned so some cancelled out each other. That is why bid /ask price for options that look will expire worthless still trade over 5 cents in the last minute
 
hajimow,

I was a market maker on the Amex for many years. I knew someone that bought 200 straddles in an active stock from the trading crowd. He lost money on the trade and some of the MM he bought it from, pointed that out a few times the week of expiration and made it difficult form him to exit the trade. This was back when many options were only trading on one exchange. On Friday near the close, the stock was pinned. Automate exercise was $0.25 back then. Near 4pm , he exited his stock hedges and after the close, filed an exception for both the 200 puts and the 200 calls, to try and get back at the other traders. Some of them came in with small good and bad positions Monday morning. The stock was up $0.50 at the open.

You can never tell that the longs will do and why.
 
Bob,

With all the talk about expirations , do you think the low volatility is pushing a lot of sellers to hold all the way to expiration?

It should make for an exciting expiration Friday if vol does break out. Especially, the exp of the monthly serials?
 
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