Option question

JackRab said:
Exercising long calls early doesn't have anything to do with margin requirements. Maybe you got lucky, but to say it's because of margin reqs are an incentive to exercise is just silly...

What ETF was that? It has probably more to do with short rates in underlying...
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UVXY. There are many ways a market maker could hedge it, and its options market is one of the most liquid of US equities (except on days like today, in the wake of its reverse split before its new options have been issued, but I wasn't assigned on such a day).
 
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JackRab said:
What @FSU says... you won't be able to buy that put. The intrinsic value is 19-17.60 = 1.40....
I seriously doubt that .80 offer is there... are you looking at Yahoo prices?
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By golly JR... I think he's found a better "risk-free" system than Marsman! ;)
 
@stockoptionstrader I don't know if this is a trading opportunity or not, my guess would strongly be that it isn't. Option market makers have electronic "eyes" in the back or their heads designed to capture these sorts of opportunities. The first time I ever heard of such an eye was while interviewing with a prop firm and it sounded quite novel, however I later learned that these "eyes" are so ubiquitous that they are even features of some professional option trading platforms. Everyone has these, everyone knows the no arbitrage bounds I described above. Professional traders have a very good handle on the arbitrage side of things, I would be very skeptical of anything described to me as a lingering arb.

@JackRab @toonerdy at risk of insighting a classic Elite Altercation, could I ask you two to reach a resolution to this? I'm pretty junior and I don't do equity options/VIX derivs so I'm not really sure which of you two is right but for my edification I would like to see a (civil) resolution.
 
cjbuckley4 said:
@stockoptionstrader I don't know if this is a trading opportunity or not, my guess would strongly be that it isn't. Option market makers have electronic "eyes" in the back or their heads designed to capture these sorts of opportunities. The first time I ever heard of such an eye was while interviewing with a prop firm and it sounded quite novel, however I later learned that these "eyes" are so ubiquitous that they are even features of some professional option trading platforms. Everyone has these, everyone knows the no arbitrage bounds I described above. Professional traders have a very good handle on the arbitrage side of things, I would be very skeptical of anything described to me as a lingering arb.

@JackRab @toonerdy at risk of insighting a classic Elite Altercation, could I ask you two to reach a resolution to this? I'm pretty junior and I don't do equity options/VIX derivs so I'm not really sure which of you two is right but for my edification I would like to see a (civil) resolution.
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Yes, It's not true, option premium is always higher than the intrinsic value. Was reading a bad platform.
 
toonerdy said:
UVXY. There are many ways a market maker could hedge it, and its options market is one of the most liquid of US equities (except on days like today, in the wake of its reverse split before its new options have been issued, but I wasn't assigned on such a day).
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What call was that? Which strike price/expiry? When was that/how many days till exp.? What price did you sell it at? Which price was UVXY at at that time?
 
JackRab said:
What call was that? Which strike price/expiry? When was that/how many days till exp.? What price did you sell it at? Which price was UVXY at at that time?
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I had the following trades of one UVXY $1 call expiring January 19, 2018 (before the most recent reverse split).

2016-10-26 09:33:51 AM Eastern: shorted for $13.34 (UVXY open $14.06, high $14.29, low $13.52, close $14.13)
2016-11-03 02:13:51 AM Eastern: assigned (UVXY on 2016-11-02: open $17.70, high $18.68, low $17.51, close $18.32)

The underlying UVXY prices are from Yahoo, which recently changed their price tables to show adjusted prices for open, high and low, so the prices I have typed in are my dividing the Yahoo prices by 5 to adjust for the recent reverse split. This is consistent with the ratio of close and adjusted close prices that Yahoo shows.
 
Hmm... how is a reverse split treated in options? I assume stikes x5 and underlying size /5 in this case?

Maybe the holder thought it was better to exercise before the split....? When was the split exactly?

(edit.. no, split didn't have anything to do with that since that was a week ago)

Okay, so you were assigned just a few days before elections...

There was a large run-up in that week. So the buyer made money, was there any premium above intrinsic left at time of assignment? And can you short UVXY?

And is there any liquidity in a call like that, that deep ITM? So, maybe the holder wanted to get rid of it since he already made money on it and thought it was better to exercise than sell market at best bid, which would be below parity/intrinsic.... and then sell the acquired underlying?
 
JackRab said:
[...]
There was a large run-up in that week. So the buyer made money, was there any premium above intrinsic left at time of assignment? And can you short UVXY?

And is there any liquidity in a call like that, that deep ITM? So, maybe the holder wanted to get rid of it since he already made money on it and thought it was better to exercise than sell market at best bid, which would be below parity/intrinsic.... and then sell the acquired underlying?
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Even if we disagree about the relative weights of the reasons why, do we now agree that very deep in the money options are more likely to be rationally exercised early when the underlying's price rises, even without dividend effects, in comparison to options less deep in the money? That seems to be the consequential idea for traders (to plan for assignment and maybe as an opportunity if this is not properly impounded into prices already).

I may post more on this later, but have to cut this short due to time tonight, although I do want to clarify that, when I suggest that 100% margin requirements may motivate exercise of very deep in the money options, I mean I think it's a substantial factor that gets weighed against other factors, such as the premium lost, etc.
 
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