SPY OTM options early assignment/exercise

M

mramaswamy1

Hi all,

I sell OTM options (puts and calls) on the SPY every month. I was reading about an advantage to trading SPX options in that European style options are not exercised/assigned before expiry. With American style options such as those on the SPY, can OTM options also be assigned/exercised early? Has anyone had any such experience? Thanks.
 
If you mean that European options might allow you to sit through a move against you since they can't be exercised, I don't see what advantage that is...you're still in a losing trade on a naked short.
If you mean can someone exercise an OTM before expiration when it's still OTM, I see that as a "gift" since you can immediately cover at the market (only time I can think of exercising an OTM is if it's close to ATM and the dividend capture is worth it).
Am I missing something?
 
Generally, nobody would exercise an OTM option (excluding instances where the option is just barely OTM), however weird things have happened.
 
Quote from mramaswamy1:

Hi all,

I sell OTM options (puts and calls) on the SPY every month. I was reading about an advantage to trading SPX options in that European style options are not exercised/assigned before expiry. With American style options such as those on the SPY, can OTM options also be assigned/exercised early? Has anyone had any such experience? Thanks.
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The answer to your question is yes, OTM options can be exercised. The option owner has the right to exercise any time.

I assume you are talking about a situation in which these OTM options move ITM. At that time, there is a possibility of early exercise.

The are advantages to trading SPX options, but you must be very sure you understand the settlement process (not the exercise/assignment process) before trading even one contract.

Mark
 
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