35 lines
2.7 KiB
Plaintext
35 lines
2.7 KiB
Plaintext
18 Part I: Basic Properties of Stock Options
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bring greater potential to a portfolio. Or if the customer is already short the XYZ
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stock, he is going to have to buy 100 shares and pay the commissions sooner or later
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in any case; so exercising the call at the lower stock price of 45 may be more desir
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able than buying at the current price of 55.
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ANTICIPATING ASSIGNMENT
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The writer of a call often prefers to buy the option back in the secondary market,
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rather than fulfill the obligation via a stock transaction. It should be strJssed again that
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once the writer receives an assignment notice, it is too late to attempt to buy back
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(cover) the call. The writer must buy before assignment, or live up to the terms upon
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assignment. The writer who is aware of the circumstances that generally cause the
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holders to exercise can anticipate assignment with a fair amount of certainty. In antic
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ipation of the assignment, the writer can then close the contract in the secondary mar
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ket. As long as the writer covers the position at any time during a trading day, he can
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not be assigned on that option. Assignment notices are determined on open positions
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as of the close of trading each day. The crucial question then becomes, "How can the
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writer anticipate assignment?" Several circumstances signal assignments:
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1. a call that is in-the-money at expiration,
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2. an option trading at a discount prior to expiration, or
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3. the underlying stock paying a large dividend and about to go ex-dividend.
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Automatic Exercise. Assignment is all but certain if the option is in-the
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money at expiration. Should the stock close even a half-point above the striking
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price on the last day of trading, the holder will exercise to take advantage of the
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half-point rather than let the option expire. Assignment is nearly inevitable even
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if a call is only a few cents in-the-money at expiration. In fact, even if the call
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trades in-the-money at any time during the last trading day, assignment may be
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forthcoming. Even if a holder forgets that he owns an option and fails to exer
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cise, the OCC automatically exercises any call that is ¾-point in-the-money at
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expiration, unless the individual brokerage firm whose customer is long the call
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gives specific instructions not to exercise. This automatic exercise mechanism
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ensures that no investor throws away money through carelessness.
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Example: XYZ closes at 51 on the third Friday of January (the last day of trading for
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the January option series). Since options don't expire until Saturday, the next day, the
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OCC and all brokerage firms have the opportunity to review their records to issue
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assignments and exercises and to see if any options could have been profitably exer- |