risk of assignment

[MK020]

What do you mean by 'below intrinsic value'?

Unless I misread your post, OTM options have no intrinsic value.

Yes, my error, I meant to write deep ITM options. I'll edit the post

 

[newwurldmn]

As many have stated to you OTM options have no intrinsic value; that's why they are called OTM. So it is meaningless to compare their option price to the intrinsic value. I think what you are trying to say is many options have an option bid price that is higher than zero when their intrinsic value is below zero. Is that what you are trying to say?

But regardless what you are trying to say, selling an option at the bid has no impact on the probability of being subject to an early assignment. Early assignment risk is not related to an option's moneyness; it has to do with the future prospect of the underlying. And besides I dunno when you are seeing these prices. Are you seeing them during non-trading hours or during active trading hours? If you are seeing these prices during non-trading hours, these are not true option prices that reflect their true value. They are more of a range of the lowest and highest price that the option has ever reached. All of the option prices that you see during non-market trading hours will be adjusted once the market starts trading.

You are either a troll or are very confused about many of the important concepts of options. If you are the latter, I strongly suggest you to read more on options regarding its basic concepts and its trading principles. You have zero understanding of either of them right now.

Early exercise has nothing to do with a stocks prospects and everything to do with financing (rates and dividends) and moneyness relative to the implied vol.

he’s saying that he sees itm that are bid with negative time value. He’s asking if someone were to hit that bid then what would a market maker do? Do they exercise the position and clear out the stock for immediate profit or do they do something else. It’s a legitimate question

 

[TheDawn]

Early exercise has nothing to do with a stocks prospects and everything to do with financing (rates and dividends) and moneyness relative to the implied vol.

he’s saying that he sees itm that are bid with negative time value. He’s asking if someone were to hit that bid then what would a market maker do? Do they exercise the position and clear out the stock for immediate profit or do they do something else. It’s a legitimate question

But he wrote OTM? Ok now I see he meant ITM. But early exercise is not just as a result of financing decisions relating to dividends and etc. Sometimes when the underlying is rising too quickly that it creates so much volatility that the bid/ask spread is just WAY too wide for one to close the option position profitably, it might be more worthwhile to exercise the option and get the underlying especially when some brokers do not charge commission on exercising options but higher commissions on the trading of options vs. trading the underlying.

What the market maker does after hitting that bid will depend on a lot of factors in terms of what the MM wants to do with the underlying, the market condition and how efficiently everything is valued.

 

[newwurldmn]

But he wrote OTM? Ok now I see he meant ITM. But early exercise is not just as a result of financing decisions relating to dividends and etc. Sometimes when the underlying is rising too quickly that it creates so much volatility that the bid/ask spread is just WAY too wide for one to close the option position profitably, it might be more worthwhile to exercise the option and get the underlying especially when some brokers do not charge commission on exercising options but higher commissions on the trading of options vs. trading the underlying.

What the market maker does after hitting that bid will depend on a lot of factors in terms of what the MM wants to do with the underlying, the market condition and how efficiently everything is valued.

That would be a suboptimal early exercise. You can always delta hedge the option and get a free option (absent financing).

in the case of the OP’s post, the market maker would hedge the option and still earn the profit and have a free option to earn more.

 

[MK020]

That would be a suboptimal early exercise. You can always delta hedge the option and get a free option (absent financing).

in the case of the OP’s post, the market maker would hedge the option and still earn the profit and have a free option to earn more.

Thanks, that's useful to know. I assume you mean hedge the long call by shorting stock. So in the case that the stock becomes hard to borrow, would the market maker then prefer to exercise early or is there still a reason they would hold it.

 

[Aisone]

Early exercise has nothing to do with a stocks prospects and everything to do with financing (rates and dividends) and moneyness relative to the implied vol.

he’s saying that he sees itm that are bid with negative time value. He’s asking if someone were to hit that bid then what would a market maker do? Do they exercise the position and clear out the stock for immediate profit or do they do something else. It’s a legitimate question

From what I'm familiar with early exercising ITM options with a little or no premium in them, is that back in the day (and I don't know if things have changed or how), is they could be exercised after the close of the stocks/index but before the futures close (now they essentially keep trading though.) So if the futures tank after the stocks close, it would be an opportunity to sell the stock or index at that closing price, and arbitrage that with the futures price (or come in shorter the following day.) So the person getting assigned would be buying the stock at the previous day's closing price, which could be a huge disadvantage if they've tanked since then.

Back in the day tho, there was only a 15 minute window for a trader to make this decision before the exchange had to be notified of one's exercised positions. On also would gauge whether or not to exercise one's long options based on anticipating of getting assigned on other short strike positions, to try and balance things out, but that was always a guessing game.

 

[newwurldmn]

From what I'm familiar with early exercising ITM options with a little or no premium in them, is that back in the day (and I don't know if things have changed or how), is they could be exercised after the close of the stocks/index but before the futures close (now they essentially keep trading though.) So if the futures tank after the stocks close, it would be an opportunity to sell the stock or index at that closing price, and arbitrage that with the futures price (or come in shorter the following day.) So the person getting assigned would be buying the stock at the previous day's closing price, which could be a huge disadvantage if they've tanked since then.

Back in the day tho, there was only a 15 minute window for a trader to make this decision before the exchange had to be notified of one's exercised positions. On also would gauge whether or not to exercise one's long options based on anticipating of getting assigned on other short strike positions, to try and balance things out, but that was always a guessing game.

you can easily trade the shares in the afterhours to lock in your profit and then have a free option on a substantial reversal.

The cutoff is actually like 530 but most brokers only offer to like 415 and best efforts after that.

 

[Aisone]

you can easily trade the shares in the afterhours to lock in your profit and then have a free option on a substantial reversal.

The cutoff is actually like 530 but most brokers only offer to like 415 and best efforts after that.

Yeah, I figured it would be different. Curious, is it still based on the regular-hours closing price of the stock, and exactly when does someone that's gotten assigned find out about it?

 

[newwurldmn]

Yeah, I figured it would be different. Curious, is it still based on the regular-hours closing price of the stock, and exactly when does someone that's gotten assigned find out about it?

Regular closing price only for expiry day.

t+1

 

[TheDawn]

That would be a suboptimal early exercise. You can always delta hedge the option and get a free option (absent financing).

in the case of the OP’s post, the market maker would hedge the option and still earn the profit and have a free option to earn more.

Yeah higher commission and still dealing with the wide spread