trade size vs probability of exercise?

[Robert Morse]

Not if you're trading European style options.

Maybe you can call or email me and explain this one. We have many clients that trade SPX and VIX. How does delivery method make

Many SPX contracts are European.

All, as far as I know. Not sure why he thinks we are bad for that. We have many SPX/VIX traders and no one offer OCC TIMS without added risk, the OCC does not allow that anymore.

 

[Robert Morse]

Are there any european style options on USA stock?

I'm not aware of any outside Flex options.

 

[bookish]

Sorry, but no. Since you did not say, I'm going to assume equity options vs options on futures. After you do a trade and it clears, the OCC is your counter-party, not the other trader that took the other side of the trade. And, all the options at your clearing firm are lumped together at the OCC. The size of your trade makes no difference.

Short ITM calls options are only exercised early if the owner perceives more value in the long stock than the long calls. Some reasons might be:

-Large dividend that exceeds the value of the put on the same strike
-Very hard to borrow stock
-corporate event like a dutch tender offer

Then the OCC has a system for determining how many of each exercised call goes to each clearing firm and the clearing firms have a system for determining how that gets allocated to each account with short calls.

Do you happen to know of any that use FIFO?

 

[Robert Morse]

Do you happen to know of any that use FIFO?

No clue, never asked and they might not tell me. That is one choice.

 

[Sig]

Do you happen to know of any that use FIFO?

There used to actually be a pretty interesting play that people would make on assignments where they'd purposely buy thousands of options that normally would net them 0, but because some funds and others didn't act optimally a few random ones were worth something. Because they were assigned pro rata, if you put in a huge order you'd get the most. They changed the process to keep this from working any more, so whatever the process is now it's probably designed around preventing that play. I don't remember the name of it at the moment, maybe one of our experts like Robert, FSU, or sle knows? I do remember reading the clearing house order which described in excruciating detail what the process was for deciding who was assigned, there's no discretion in it at all.

 

[Robert Morse]

You might be referring to dividend plays. X-div the next day, buy or sell a DITM vertical call spread where the options have a large open interest. Exercise the long call, so you have a buy-write with what you don't assigned. You need very low commission rates and it helps to be a market maker. Many customers would not exercise because of the margin.

Not sure if my clearing firm has FIFO or not. I only did this a hand full of times. Some traders only did this in massive size.

 

[Sig]

You might be referring to dividend plays. X-div the next day, buy or sell a DITM vertical call spread where the options have a large open interest. Exercise the long call, so you have a buy-write with what you don't assigned. You need very low commission rates and it helps to be a market maker. Many customers would not exercise because of the margin.

Not sure if my clearing firm has FIFO or not. I only did this a hand full of times. Some traders only did this in massive size.

Yes, that was exactly it! I vaguely remembered that MM mostly did it and now I understand why.