Risk of a short ITM option getting executed?

R

Ray Johnson

Hi all,

I am an option seller. I mainly trade short strangles on high-volume ETF's (EWZ, XME, IWM, QQQ, ...).
When there is a risk that a leg becomes ITM (in-the-money) I close that leg.
However, sometimes the markets move so fast that a leg is ITM before I can close it.
Now, I was wondering, what are the chances, or what is the risk, that an ITM short option gets executed on me...?
From what I hear, the risk is the highest:
  • the week before expiration (and not so much more weeks before that ..)
  • the days before ex-div (especially short calls ..)
  • when the option is deep ITM .. (when there is little or no time value left)
I would like to know, what are your experiences with 'being executed' on a short ITM option?
What where the circumstances? How many days before expiration date? How far was it ITM?
I just would like to get a feel for how much I risk I am in when being ITM ....

Kind regards
 
Ray:
First, regarding the terminology: replace "executed" with "assigned".
I think the criteria for higher probability of being assigned agrees with your statements.
I also think if you can avoid expiration week, you can probably adequately handle an assignment, by merely picking up another option and converting the assigned position, with the primary extra losses being the cost of assignment and extra commissions. Others may have more detail to add.

The biggest issue with assignment at expiration, is you have gap risk for the next market open.
 
Last edited:
> replace "executed" with "assigned".
--- True! You 'execute' when you are long and you 'are being assigned' when you are short.
English is not my native language so sometimes I have to look for words ... :-)

> you can probably adequately handle an assignment,
--- I really don't like being assigned, so I try to avoid it at all times. Usually I roll the 'threatened' option 3 to 4 weeks further and more OTM, before it is ITM. But sometimes things move too fast for me to interfere in time.
 
I got assigned early on a leg of a butterfly spread because I didn't pay attention to the dividends on SPY. It was the Thursday night before the previous dividends. If I recall, the leg was a 213 Call and SPY was 215 the night before.
Good lesson. Luckily, the position gapped in my favor the following morning, but it could have just as easily not.
 
stepandfetchit said:
Ray:
First, regarding the terminology: replace "executed" with "assigned".
I think the criteria for higher probability of being assigned agrees with your statements.
I also think if you can avoid expiration week, you can probably adequately handle an assignment, by merely picking up another option and converting the assigned position, with the primary extra losses being the cost of assignment and extra commissions. Others may have more detail to add.

The biggest issue with assignment at expiration, is you have gap risk for the next market open.
More...

If you can trade a bit larger, consider replacing SPY and IWM, with SPX and RUT respectively. No assignment possible, lower commissions (fewer contracts necessary), and if in the US, a small tax break on profits from section 1256 contracts.
 
Yes, it seems the days before ex-div can be dangerous...

I used to trade Iron Condors on SPY but I like short strangles better. For strangles, I find SPY a little too expensive because it requires a lot of margin per contract. I use IWM and QQQ on occasion for smaller positions, but mainly I use the cheaper ETF's such as EWZ, XME, EEM, FXI ... as underlying.
Thanks for the pointer to SPX and RUT. I will look into it.
 
You must log in or register to reply here.
Back
Top