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training_data/relevant/text/001e0a60041601127364b3796b04c936b95a79f65e2668ef8fbd6749c1c1b0dd.txt

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+Gapter 1: Definitions 19 
+cised but were not. If XYZ closed at 51 and a customer who owned a January 45 call 
+option failed to either sell or exercise it, it is automatically exercised. Since it is worth 
+$600, this customer stands to receive a substantial amount of money back, even after 
+stock commissions. 
+In the case of an XYZ January 50 call option, the automatic exercise procedure 
+is not as clear-cut with the stock at 51. Though the OCC wants to exercise the call 
+automatically, it cannot identify a specific owner. It knows only that one or more XYZ 
+January calls are still open on the long side. When the OCC checks with the broker­
+age firm, it may find that the firm does not wish to have the XYZ January 50 call exer­
+cised automatically, because the customer would lose money on the exercise after 
+incurring stock commissions. Yet the OCC must attempt to automatically exercise 
+any in-the-money calls, because the holder may have overlooked a long position. 
+When the public customer sells a call in the secondary market on the last day of 
+trading, the buyer on the other side of the trade is very likely a market-maker. Thus, 
+when trading stops, much of the open interest in in-the-money calls held long 
+belongs to market-makers. Since they can profitably exercise even for an eighth of a 
+point, they do so. Hence, the writer may receive an assignment notice even if the 
+stock has been only slightly above the strike price on the last trading day before expi­
+ration. 
+Any writer who wishes to avoid an assignment notice should always buy back ( or 
+cover) the option if it appears the stock will be above the strike at expiration. The 
+probabilities of assignment are extremely high if the option expires in-the-money. 
+Early Exercise Due to Discount. When options are exercised prior to 
+expiration, this is called early, or premature, exercise. The writer can usually 
+expect an early exercise when the call is trading at or below parity. A parity or 
+discount situation in advance of expiration may mean that an early exercise is 
+forthcoming, even if the discount is slight. A writer who does not want to deliv­
+er stock should buy back the option prior to expiration if the option is apparently 
+going to trade at a discount to parity. The reason is that arbitrageurs (floor 
+traders or member firm traders who pay only minimal commissions) can take 
+advantage of discount situations. (Arbitrage is discussed in more detail later in 
+the text; it is mentioned here to show why early exercise often occurs in a dis­
+count situation.) 
+Example: XYZ is bid at $50 per share, and an XYZ January 40 call option is offered 
+at a discount price of 9.80. The call is actually "worth" 10 points. The arbitrageur can 
+take advantage of this situation through the following actions, all on the same day: