Option Mystery

Traden4Alpha:

you're right about points: 1),2),3),4), even if you don't trade options, your considerations are right.
You're wrong on point 5). Exercise is only a favor to you.

About [selling put]/[selling covered call], operations are obvisously not the same, because they are not the same(!), point, EVEN IF, (I underline this EVEN IF), from a synthetic point of view the profit/loss outcome could be considered the same, due to eventually efficient and correct market prices.

But you can't know if the correct market prices will persist, or you'll be able to close at these correct market prices.

About synthetic short, there is a PURE NONSENSE here, a trader cannot say that a synthetic short is better than a vanilla short, every SYNTHETIC operation is a SYNTHETIC operation, point, that only TENDS to reply the profit/loss future results, but CANNOT be considered BEST or WORSE without considering ALL the involved parameters: speed and reliability of the broker, commission costs, interests charged/credited, options spreads, dividends and so on.....
Noone can say that a synthetic trading position will always be better or worse than the original one. Every case should be studied as a particular case.
 
I was going to ignore posting(and this thread entirely) till Friday but Traden4Alpha asked a couple of important questions. The quick answer is that there are exceptions to everything. Everytime I post something, there are about 10 howevers in the back of my head. I don't post these because I would never finish and the reasons behind some of these are a little fuzzy at times. An example is question #1: Is the net delta of a synthetic short always -1? The answer is no. But for your sake, you should assume that they are.
 
Originally posted by gerico
Traden4Alpha:

About [selling put]/[selling covered call], operations are obvisously not the same, because they are not the same(!), point, EVEN IF, (I underline this EVEN IF), from a synthetic point of view the profit/loss outcome could be considered the same, due to eventually efficient and correct market prices.

But you can't know if the correct market prices will persist, or you'll be able to close at these correct market prices.
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Can you give one actual example of such an event? Where a covered write had a different payoff than the equivelent short put? (Not speaking of a 5 or 10 cent differential here)
 
Excellent guys. 4Alpha asked the very questions that I have as I look over the options chain when considering a short.

Thank you for eloquently stating what I was thinking. And the replies to those questions solidified my strategy. For me, short the stock is the way, in ... out... done.
 
Originally posted by gerico
Traden4Alpha:
You're wrong on point 5). Exercise is only a favor to you.
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<b>Benefits of being assigned?</b> Ok, I can see why having your sold call get exercised might be beneficial. It is an enforced way of cutting losses short (the person who bought the call would likely exercise it if the stock had moved sharply upward, meaning your bet on a downtrend was wrong). Of course not being in control of when you took the loss might not be pretty, although I suppose you have some leeway as to when to buy the shares that the exerciser of your call is demanding???? A cursory read of a couple of broker's policies suggests that on assignment of the call option, your account might immediately show that you were short the shares from the call (in addition to the put that you still hold). I don't know when the cash from the call would appear (I suppose T+3 applies?). Hmmmm.... very tricky.

<b>Data on option assignments?</b> How often do options get assigned anyway? I Googled around the internet, but found little on the likelihood of assignment (only a vague statistic that 10% are assigned, mostly at expiration). Apart from automatic assignment of options that are in-the-money by 0.75 at expiration, the only other situation where assignment seemed likely was prior to the ex-dividend date. Anyone know of a data source on option assignments? How often do they actually occur? I know that the assignment process is random and was wondering the % chance of exercise for traders who sell options.

<b>Some useful links:</b> I also ran across this useful article on the internet at:

http://www.mrstock.com/resourceCenter/exercise.html

And the assignment policies of a couple of brokers:

http://www.cybertrader.com/support/optionsexercise07162001.htm
http://www.datek.com/helpdesk/oassignment.html


Still leaving open the option of options,
Traden4Alpha
 
Originally posted by Traden4Alpha

<b>Benefits of being assigned?</b> Ok, I can see why having your sold call get exercised might be beneficial. It is an enforced way of cutting losses short (the person who bought the call would likely exercise it if the stock had moved sharply upward, meaning your bet on a downtrend was wrong). [...]
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No need for complicating things. The person who exercises an option gets only its intrinsic value out of the transaction. Since the value of an option cannot be less than its intrinsic value (or can it?!) the assigned party is favored.
 
Originally posted by Lobster


No need for complicating things. The person who exercises an option gets only its intrinsic value out of the transaction. Since the value of an option cannot be less than its intrinsic value (or can it?!) the assigned party is favored.
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You're right, I am complicating things. But, I have found that sometimes the devil is in the details with trading. Little discrepancies between the simplified, idealized model of trading and the actual mechanics of trades can nickel and dime profits down to losses (or provide extra nickels and dimes if you do it right :) ). That was why I wondered about the exact mechanics of option assignment and the exact set of actions to cope with a call being exercised.

In the case of an exercised Call, the seller of the option must pony up the requisite shares, while the option buyer ponies up the strike price per share. If the option seller must buy shares in the open market immediately on assignment, then they run the risk of being forced to buy high (buying shares on triple-witching day -- WHAT FUN!). If the option seller is left with a short position, then they have the trading issue of covering that short position at their convenience (its own risks and rewards). And, in either case, there is the question of when the strike-price money from the option buyer actually appears in the seller's account (affects buying power, margin interest charges, and PDT limits).

These may be nits, but since many traders worry about commissions being 0.01/share vs. 0.02/share, concerns about the exact costs and risks associated with options assignment seems warranted. Admittedly, the point is entirely moot if one exits all open assignable options positions before expiration (and the underlying stock pays no dividend). But in exiting the synthetic short, one will pay both commission charges and the spread on the the call.

Wondering if the devil in the details giveth or taketh away (or doth not exist) for the case of assigned calls,
Traden4Alpha
 
Originally posted by Traden4Alpha
How often do options get assigned anyway? I Googled around the internet, but found little on the likelihood of assignment (only a vague statistic that 10% are assigned, mostly at expiration).
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Sounds plausible.
It's not rare for deeply ITM options (especially index) to trade at discount, especially near exp. So one metric would be to use the discounted's OI.
Not difficult to calc how much of a discount is needed (to present an arb opportunity); there's probably an example in McMillan or Natenberg.
 
Quote from OPTIONAL777:



.....and typically, you get more for the calls than you do for the puts.
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If the bias is up, the calls will have more premium, and if the bias is down, the puts will have more premium.

Good luck trading to all,

Bob on Whidbey Island


"Don't confuse effort with results"
 
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