option assignment

[dagnyt]

Quote from TheoHornsby:

>>> I know you know that the owner of an ITM option can submit a DO NOT EXERCISE memo to his broker. <<

Wouldn't that only be the case if the option was on;y a little in the money? And even if true, why would anyone throw away the ITM amount> Anything to do with pinning risk?

If you look at it from the point of view of a small retail customer, is it throwing money away.

Let's say you own 2 Jun 50 calls and hold them until the final moments. The stock is 50.02 and no one wants to buy your calls. You are stuck with them.

Do you want to use $10,000 cash to buy 200 shares - and be charged a $15 fee by your broker? You pay $15 for the right to save $4. Is that a good move?

And don't forget there's yet another commission if you decide to sell the stock.

DO NOT EXERCISE is a very good idea for the right investor at the tight time. As an aside, I'd argue that the investor made a big mistake to hold the options so long, but that's another story.

Regarding pin risk: That is usually an issue when the stock is right at the strike, but someone may make the decision NOT to exercise if the option is barely ITM.

Mark

 

[TheoHornsby]

It would seem to me that anything withing a few cents even 5-10 cents of the strike on either side going into the close would be subject to pinning because you don't know which way the stock will go in those last minutes. But I get your point about Do Not Exercise. Thanks.

 

[dagnyt]

Quote from TheoHornsby:

It would seem to me that anything withing a few cents even 5-10 cents of the strike on either side going into the close would be subject to pinning because you don't know which way the stock will go in those last minutes. But I get your point about Do Not Exercise. Thanks.

If you have no intention of exercising, then forget about pinning and just sell your options when you can. Why exercise even when 25 cents (or $25) ITM

Mark

 

[MTE]

Quote from TheoHornsby:

It would seem to me that anything withing a few cents even 5-10 cents of the strike on either side going into the close would be subject to pinning because you don't know which way the stock will go in those last minutes. But I get your point about Do Not Exercise. Thanks.

You are forgetting about afterhours trading. The official close will be used for automatic-exercise purposes, but when it comes to people deciding whether to exercise or not then they look at the afterhours trading.