Why would anybody exercise early a DITM ES option?

[Wheezooo]

You're basically saying that when the markets goes down, your DITM call despite being still DITM won't hedge as well as before (delta decreasing) so you could prefer exercising. It makes sense.

That would make the opposite of sense. You are getting shorter on a down move. That's a bad thing?

a) Don't exercise call, hold short/ or sell underlying against it. You're flat but if market craps = Huge win.
b) exercise call. gave up a free put. You're Flat. Market craps = 0.

"Back to the original topic, if you were selling that specific DITM call in a combo like a box, the small profit you get from the early assignment will probably not compensate the troubles caused by that missing option in your combo."

yep, I'll say it again, and preface it again with 'no one listens.' The formula for whether you exercise an option or not depends on you purchasing in the corresponding OTM option. You ALWAYS buy in that f'n OTM option!!!! (Unless you already have a shit ton of long OTM options in that area)

 

[Wheezooo]

Now, now. This "vacation" is going to be a week of playing with options and futures in sim. "No work"... shyeah, good luck with that one. Pulling me away from this stuff is going to require a locomotive, and I'd leave nailtracks in the asphalt.

I'll take a real vacation - like a month of sailing the Med, or maybe my old stomping grounds in the Caribbean - once I'm averaging at least half of what I make working. Until then, it's nose to the grindstone.

Nah, it's when you put on a Sacramento game, and turn to someone and ask how they are on the Steph Curry 20 point call, or the 20-25 call spd that you realize there is a problem. Don't remember a time waiting for the 4-5-6 line that we didn't make markets on when the train would come. Nothin' like sellin' the 10 minute call and hearing the announcer saying the line just shut down. This is how you learn catastrophic risk.

 

[BlueWaterSailor]

Nah, it's when you put on a Sacramento game, and turn to someone and ask how they are on the Steph Curry 20 point call, or the 20-25 call spd that you realize there is a problem. Don't remember a time waiting for the 4-5-6 line that we didn't make markets on when the train would come. Nothin' like sellin' the 10 minute call and hearing the announcer saying the line just shut down. This is how you learn catastrophic risk.

"Trading isn't gambling."

Well... yeah, but... except for that one time... OK, maybe those five hundred times, but who's counting?

(Watch pro traders, and you'll inevitably hear stuff like "yeah, so what's the spread on this baseball game? I'll take that", or "I've got a poker game planned for later", or... endless variations. Trading may not be gambling, but many traders are gamblers.)

 

[GregorySG9]

"Back to the original topic, if you were selling that specific DITM call in a combo like a box, the small profit you get from the early assignment will probably not compensate the troubles caused by that missing option in your combo."

yep, I'll say it again, and preface it again with 'no one listens.' The formula for whether you exercise an option or not depends on you purchasing in the corresponding OTM option. You ALWAYS buy in that f'n OTM option!!!! (Unless you already have a shit ton of long OTM options in that area)

That would make the opposite of sense. You are getting shorter on a down move. That's a bad thing?

a) Don't exercise call, hold short/ or sell underlying against it. You're flat but if market craps = Huge win.
b) exercise call. gave up a free put. You're Flat. Market craps = 0.

"Back to the original topic, if you were selling that specific DITM call in a combo like a box, the small profit you get from the early assignment will probably not compensate the troubles caused by that missing option in your combo."

yep, I'll say it again, and preface it again with 'no one listens.' The formula for whether you exercise an option or not depends on you purchasing in the corresponding OTM option. You ALWAYS buy in that f'n OTM option!!!! (Unless you already have a shit ton of long OTM options in that area)

You don't exercise the option!
You're selling it.
One another party will exercise it. So you earn a little profit, the time value but that still sucks. A bit dangerous when selling for 20 millions of boxes...

 

[Wheezooo]

You don't exercise the option!
You're selling it.
One another party will exercise it. So you earn a little profit, the time value but that still sucks. A bit dangerous when selling for 20 millions of boxes...

 

[.sigma]

Also, let's say you have a DITM call option with strike at K and currently, the price is of the underlying is S with S > K. The intrinsic value of your option then is:

I = S - K

If P is the premium paid, then the price of your call option is:

C = P + I

Let's say you bought the option for a hedge and you are now expecting the price of the underlying to decline by $s where s > S-K (so still DITM). So the new value would be:

I = (S - s) - K
C = P + (S - s) - K

But P has also declined:

C = (P-p) + (S-s) - K

In order for you to maintain the right hedge, you might decide exercise so you don't lose p+s in exposure.

I retain the right to say I have been up since 3am.

True but,

put-call parity arb states that:

c-P=S-Xexp(-rT)

So lets construct a trade that we buy a put, sell a call with the same strike, then buying spot.

At exp the trade is worth the strike price

P-c+S=Xexp(-rT)