436 Part IV: Additional Considerations 
If one is truly undecided about whether he will be assigned on his short puts, 
he might look at several clues. First, has any late news come out on Friday evening 
that might affect the market's opening or the stock's opening on Monday morning? If 
so, that should be factored into the decision regarding exercising the calls. Another 
clue arises from the price at which the stock was trading during the Friday expiration 
day, prior to the close. If the stock was below the strike for most of the day before 
closing at the strike, then there is a greater chance that the puts will be assigned. This 
is so because other arbitrageurs (discounters) have probably bought puts and bought 
stock during the day and will exercise to clean out their positions. 
If there is still doubt, it may be wisest to exercise only half of the calls, hoping 
for a partial assignment on the puts (always a possibility). This halfway measure will 
normally result in some sort of unhedged stock position on Monday morning, but it 
will be smaller than the maximum exposure by at least half. 
Another approach that the arbitrageur can take if the stock is near the strike of 
the reversal during the late trading of the options' life - during the last few days - is 
to roll the reversal to a later expiration or, failing that, to roll to another strike in the 
same expiration. First, let us consider rolling to another expiration. The arbitrageur 
knows the dollar price that equals his effective rate for a 3-month reversal. If the cur­
rent options can be closed out and new options opened at the next expiration for at 
least the effective rate, then the reversal should be rolled. This is not a likely event, 
mostly due to the fact that the spread between the bid and asked prices on four sep­
arate options makes it difficult to attain the desired price. Note: This entire four-way 
order can be entered as a spread order; it is not necessary to attempt to "leg" the 
spread. 
The second action - rolling to another strike in the same expiration month -
may be more available. Suppose that one has the July 45 reversal in place (long July 
45 call and short July 45 put). If the underlying stock is near 45, he might place an 
order to the exchange floor as a three-way spread: Sell the July 45 call (closing), buy 
the July 45 put (closing), and sell the July 40 call ( opening) for a net credit of 5 points. 
This action costs the arbitrageur nothing except a small transaction charge, since he 
is receiving a 5-point credit for moving the strike by 5 points. Once this is accom­
plished, he will have moved the strike approximately 5 points away and will thus have 
avoided the problem of the stock closing at the strike. 
Overall, these four risks are significant, and reversal arbitrageurs should take 
care that they do not fall prey to them. The careless arbitrageur uses effective rates 
too close to current market rates, establishes reversals with puts in-the-money, and 
routinely accepts the risk of acquiring an unhedged stock position on the morning 
after expiration. He will probably sustain a large loss at some time. Since many rever­
sal arbitrageurs work with small capital and/or have convinced their backers that it is