Options

[Stocker2009]

1. When do I know when the holder or writer will excercise for a physical delivery or cash settlement option?
2. Can a Spread help in determining when the excercise occurs ?

[Stocktrading101]

Great questions and honestly I do not know the answer as I never got into options. But perhaps bumping this thread up will help.

What I can tell you though is you dont know when the holder will exercise the option as they can do it at any time. And 2. typically no one will exercise their option and take the shares unless they are up on the trade overall. Majority of the time the contract itself is just sold (you can sell your contract at any time).

Sorry I can't be of more help!

[Mark Wolfinger]

1. When do I know when the holder or writer will exercise for a physical delivery or cash settlement option?

It is almost never right for a call owner to exercise early - unless the stock is paying a large dividend and the option is deep in the money. Then it's often correct to exercise one day BEFORE the stock trades ex-dividend.

Puts are exercised early, but only when they are very deep in the money. The put owner who exercises loses money if the stock rallies above the strike price, so the exerciser must be fairly sure that is not going to happen.


You can never know with certainty. The option owner has the right to exercise any time prior to expiration. The chances of being assigned early are very high ONLY WHEN:

a) A call option has a delta of 100 (99 is not good enough) AND the bid price is less than or equals the option's intrinsic value (the amount by which the stock price exceeds the strike price).

b) A put option is deep in the money and the bid price is less than it's intrinsic value (the amount by which the stock price is below the strike price).

2. Can a Spread help in determining when the excercise occurs ?

NO. It makes zero difference. The person who exercises the option has no idea what your position is. The person who is assigned an exercise notice is selected randomly, and thus, your position does not matter.

[aquaswim47]

Doesn't the option owner want to exercise the option and sell it immediately for cash to avoid it becoming worthless or should an option holder treat it as a European option and only worry about it at expiry?

Option trader for 6 months
Stock trader for 2 years
Investing for 3 years

[Mark Wolfinger]

"Doesn't the option owner want to exercise the option and sell it immediately for cash to avoid it becoming worthless or should an option holder treat it as a European option and only worry about it at expiry?"

No. There is no reason to exercise.
There is no reason to treat it as a European option.

WHEN YOU NO LONGER WANT TO OWN THE OPTION, SELL IT. It's that simple. You bought it when you wanted it - and you sell it when you don't.

I don't know how the idea that an option owner would want to exercise a call option and then immediately sell stock originated, but somewhere someone is confusing investors. You almost never (no need to go into exceptions now) want to exercise an option.

Don't forget, broker usually charge a hefty fee to exercise and then another to sell stock. It's cheaper to sell the option.

Mark