Chapter 29: Introduction to Index Option Products and Futures 503 
bearish late in the day, even after the close, he might conceivably try to exercise his 
calls to liquidate his position. The exchanges recognize that such tactics might not be 
in everyone's best interest - for example, if one waited to see how the money supply 
numbers looked on a particular evening before exercising, he would definitely have 
an advantage over the writers of those same options. The writers could no longer 
viably hedge their positions after the market had closed. In order to prevent this, 
cash-based option exercise notices are only acceptable until 5 minutes after the 
options close trading on that exchange on any given trading day ( except expiration, of 
course), in order to allow both holders and writers to be on somewhat equal footing. 
There is one more fact regarding exercise of cash-based options that will inter­
est brokerage customers, retail or institutional. Most brokerage firms will charge a 
commission for the cash-based option exercise or assignment. When index options 
were first traded, commissions were quite high. Currently, however, one should gen­
erally be paying a commission based upon the equivalent option price. 
Example: In the previous example, one exercised a ZYX Sep 160 call at expiration 
when the index closed at 175.24. This is a differential of 15.24. One should pay a 
commission as if he had sold his long calls at a price of 15.24, not on anything more. 
For writers of cash-based options, things are not so different from stock options. 
The writer is still warned of impending assignment by the fact that the option is trad­
ing at a discount. If it is not trading at a discount, it is probably not in danger of being 
assigned. Also, since there is no stock involved and therefore no dividends paid, the 
writer of a cash-based put option need only be concerned with whether the put is 
trading at a discount, not with whether it is trading at a discount to underlying price 
less the dividend, as is the case with stock options. 
Traders doing spreads in cash-based options have special worries, however. 
What may seem to be a limited-risk spread may acquire more risk than one initially 
perceived, due to early assignment of the short options in the spread. Consider the 
following example. 
Example: Suppose that an investor establishes a bearish call spread in ZYX options 
- he buys the November 160 call at a price of 1 and simultaneously sells the 
November 155 call at 3. His risk on the spread is $300 plus commissions if he has to 
pay the maximum, limited debit of $500 to buy back the spread, or so it appears. 
However, suppose that the index rises substantially in price and the spreader is 
assigned on the short side of his spread with the index at 175.24. He thus is charged 
a debit of $2,024 to "cover" each short call via the assignment: $100 times the in-the­
money amount, 175.24 - 155.00, or 20.24. He receives this assignment notice in the