Why did I not get an assignment notice?

noob_trad3r · May 15, 2009

I sold 75 contracts GE strike of 13 for this may 11. When I sold them I got 1.26 premium on may 11 GE was over 14

How come the buyer paid 1.26 and never sent the assignment notice, GE closed under 13 today. So this person just threw away 9450 dollars? not including commision of course.

dagnyt · May 15, 2009

Quote from noob_trad3r:

I sold 75 contracts GE strike of 13 for this may 11. When I sold them I got 1.26 premium on may 11 GE was over 14

How come the buyer paid 1.26 and never sent the assignment notice, GE closed under 13 today. So this person just threw away 9450 dollars? not including commision of course.

NOTE: Unless you are a multimillionaire, you have no business trading 75-lots of GE calls. You understand far too little about how options work. I strongly suggest you go back to 2-lots while you are learning.

1) It is almost always wrong for an investor to exercise a call option prior to expiration. It's crucial that you understand that.

2) If your investor had exercised his call options, he would own stock worth 12.80, for which he would have paid 13. That's a 20-cent loss, per share, on top of the money lost by paying for the options.

3) Your investor did the right thing NOT to exercise.

4) By hold the options until today, he could - if he wanted to own GE stock - paid less than 13 per share. Why do you think that he should have paid 13 when by holding, he gave himself the chance to own stock at a lower price?

If you believe he should have bought your calls and exercised them and sold stock, that would be really foolish. He paid more than the intrinsic value of the options, and doing that would have resulted in an immediate loss. Example: Pay 13 for stock, 1.26 for calls, and sell stock at 14.11. Lost $15. Who is his right mind would do that?

5) The option buyer threw away NOTHING. He bought calls. You have no idea if he held them until they expired, losing it all, or if he hedged those calls and actually earned a nice profit.

If you do not understand this concept, please let us know and more help is available.

Mark
http://blog.mdwoptions.com/

noob_trad3r · May 15, 2009

Thanks for the further details. This was a covered call on GE that I bought for 6.88 (7500 shares)

I guess he could have hedged with a put?

dagnyt · May 16, 2009

Quote from noob_trad3r:

Thanks for the further details. This was a covered call on GE that I bought for 6.88 (7500 shares)

I guess he could have hedged with a put?

There is no way to know whether one person bought all 75 of your calls, or if 5 traders took 15 each, or any of the many other possibilities.

There is also now way to know if the call buyer hedged. The most likely hedge would have been to short stock at that 14+ price, on a delta neutral basis. That would have been about 6500 shares, depending on the option delta at the time of the trade.

It's just one of those things that cannot be known. You use your options for your purposes and the guy/gal on the other side does the same.

BTW the price you paid for GE is irrelevant to this discussion. I hope you understand that point. I am not trying to say anything negative here - just want you to understand what you are doing, and how options work.

Mark

RobtF · May 16, 2009

Quote from noob_trad3r:

I sold 75 contracts GE strike of 13 for this may 11. When I sold them I got 1.26 premium on may 11 GE was over 14

You bot GE at a multi year bottom and then you sold calls 4 days before expiry under the current price? Why? You lucked out twice when they they closed .14 OTM. You'll get get to sell them again. Are you doing any tax planning - you'll have a large capital gain. Did you mean to protect your gain? you should have sold calls DITM or BOT puts.

SForce · May 16, 2009

Quote from dagnyt:

There is no way to know whether one person bought all 75 of your calls, or if 5 traders took 15 each, or any of the many other possibilities.

Mark

That isn't entirely accurate. You could look up and see the trades that took place on that option and since the volume is generally low enough, you know what time they sold, and on what exchange they were sold you would be able to see if all 75 sold at once, or 60 and then 15 etc etc.

I don't know who else provides this feature (I'm sure there's tons of places) but I sometimes use it to see which exchanges are being favored for a particular option when I'm trying to get in on the bid or out on the ask.

(I'm sure some people will miss it so: Click on the volume in the chains that is in blue)

http://www.ise.com/WebForm/md_livevol.aspx?categoryId=124&header2=true&menu1=true

I guess (just to be anal about it) it would've been more accurate to say that it is irrelevant who actually bought the contracts since assignment is random. Assuming some guy did buy all 75 of his contracts and had some play that required him to exercise them when they went ITM; he may have. He (the OP) just wasn't the one chosen for assignment/exercise.

(I am lacking just a little bit of sleep so feel free to correct anything I was wrong on.)

gody3 · May 16, 2009

Quote from SForce:

I don't know who else provides this feature (I'm sure there's tons of places) but I sometimes use it to see which exchanges are being favored for a particular option when I'm trying to get in on the bid or out on the ask.

Does you broker not have smart routing to the best priced exchange?

xflat2186 · May 16, 2009

Quote from SForce:

That isn't entirely accurate. You could look up and see the trades that took place on that option and since the volume is generally low enough, you know what time they sold, and on what exchange they were sold you would be able to see if all 75 sold at once, or 60 and then 15 etc etc.

I don't know who else provides this feature (I'm sure there's tons of places) but I sometimes use it to see which exchanges are being favored for a particular option when I'm trying to get in on the bid or out on the ask.

(I'm sure some people will miss it so: Click on the volume in the chains that is in blue)

http://www.ise.com/WebForm/md_livevol.aspx?categoryId=124&header2=true&menu1=true

I guess (just to be anal about it) it would've been more accurate to say that it is irrelevant who actually bought the contracts since assignment is random. Assuming some guy did buy all 75 of his contracts and had some play that required him to exercise them when they went ITM; he may have. He (the OP) just wasn't the one chosen for assignment/exercise.

(I am lacking just a little bit of sleep so feel free to correct anything I was wrong on.)

First of all as a retail investor you get the NBBO so itâs irrelevant which exchange it goes to and odds are your retail order goes to the place where your broker gets the best kickback for sending orders assuming its still NBBO.

It never matters who does the other side of the trade. For example if you sold 50 contracts opening and the MM or customer who bought them then immediately exercises those his exercise goes into the pool of all the people who are short that option and they get assigned randomly. Just because the person who bought yours exercised them never means heâs the only one to assign you.

jwcapital · May 16, 2009

Quote from jwcapital:

Reread the other responses to learn. Forget about the buyer--he may have been short C20 calls for all you know, and wanted to close out his trade, or the calls may have been quickly sold for a small profit--which MM's and arbs do, for their commissions are miniscule. Also, for a million other reasons. In your case you made $9450.00 by risking your entire account (unless you had a mental stop). And getting out of your calls as the market takes off---you will get a lousy execution, especially during option expiration week. Again, you have no idea where the buyer stands and you shouldn't care. So, consider yourself lucky, for you gambled and won.

dagnyt · May 16, 2009

Quote from SForce:

That isn't entirely accurate. You could look up and see the trades that took place on that option and since the volume is generally low enough, you know what time they sold, and on what exchange they were sold you would be able to see if all 75 sold at once, or 60 and then 15 etc etc.

it would've been more accurate to say that it is irrelevant who actually bought the contracts since assignment is random

It's 100% accurate. Time and sales tells you nothing.

The trade reports are based on the actions of the seller. So, if 75 trade at once, there is no way for you to know whether the trade went to one bidder of whether several market makers divided the 75-lots. Or even if a public customer has a bid on the electronic book and was in line ahead of the market makers.

It's all irrelevant to the post. The OP has no interest in what the person on the other side of the trade does with the options.

Once again, assignement doesn't make any difference either. Especially in a case in which the options expired worthless.

Mark