518 Part V: Index Options and Futures 
made a rather large move by the time the futures open. Such a small gap is normal­
ly not extremely damaging to the naked writer. 
One cannot assume that an index can never gap open widely - if something 
drastic were to happen in the marketplace that caused opening gaps in many stocks, 
then a gap could appear in the index itself. The worst case of such a gap, percentage­
wise, was the stock market crash in 1987 when the major indices such as OEX and 
S&P 500 opened down over 20 points. Nothing has come close to that before or 
since, but the possibility always exists that it could happen again. Therefore, one can­
not assume that naked option writing of index options is a low-risk strategy; howev­
er, it is generally less risky than naked option writing of equity options. 
HANDLING EARLY ASSIGNMENT OF CASH-BASED OPTIONS 
The greatest problem that a spreader of index options has is the possibility of early 
assignment. This removes his hedge on one side of his position, exposing him to 
much more risk than he had wanted or anticipated. 
One can often obtain a clue before early assignment occurs by observing the 
price of the in-the-money options. If they are trading at a discount, one can expect 
assignment to be more likely. 
Example: '.lYX is trading at 357 a few days before expiration of the January options. 
The stock market rallies heavily near the close, and the January 340 calls are trading 
with a market of 16½ to 16¾ after 4 pm EST. Since parity is 17 for these calls, it is 
likely that a writer will receive an assignment notice in the morning. 
The strategist who observes this situation taking place must make a rather quick 
decision. Since the market has rallied heavily on the close, it is likely that arbitrageurs 
or institutional accounts who are long index options are going to exercise them. The 
cynic among us would even think that they might be short stocks as well which they 
plan to cover in the morning. Notice that the effect of hedged call option sellers (i.e., 
spreaders) receiving assignment notices will be to make them all long the market. 
The short side of their spread will have been removed via assignment, and they will 
be left with only the long side. Therefore, in order to liquidate or hedge, they will 
have to sell stocks or index futures and options in the morning. This would force the 
market down temporarily and would be a boon to anyone who was short overnight. 
The spreader's first potential choice of action is to notice what is happening near 
the close of trading and to try to exercise his long calls since he expects assignment 
of his short calls. The assignment, of course, is not certain - he is merely projecting 
it. Therefore, he could outfox himself and end up being very short if he did not 
r~ceive an assignment notice on his short calls.