Robert:
I know that if the price does not rise to the strike, you get to keep the credit, but if it does rise to the strike, at what point do your shares get sold at the strike, and you see the resulting balance in your account?
Your questions concern "early assignment", or the forced sale of your covered stock. In theory, this could at any time up to option expiration (assuming American-style options, not European ones, which can only assign at expiration). In practice, it will rarely happen, and you will not be assigned (forced to sell your covered shares) unless the underlying stock closes very near (say 1/8th pt below), at, or above the option's strike price. (The reason is that the option buyers could, until that time, sell their options on the open market for more than they would net by forcing assignment and then selling the stock they've received - this is the concept of "time premium", which is absolutely essential to understanding how options work.)
Does it happen instantaneously, or the next day?
For my broker (Fido), assignment typically happens on the Sunday following the option's expiration (which is technically on Saturday, not Friday as some people think); actual settlement happens 3 days after this, as in any normal stock sale. The funds from the sale are of course available immediately (ie, Monday morning). I assume most brokers operate in a similar fashion.
say the price rises to 15 on the day of expiration, and your shares don't dissapear, can you then sell them, or does that leave you in a naked position?
If you don't get assigned (quite possible), I would assume you can sell your shares starting in pre-market on Monday AM. The position is not naked because the covering option has expired and is no more.
At what point would you know that you weren't called out, even though the price is at or in the money on the day of expiration?
Again, with my broker, it would be late on Sunday night; others might vary slightly.
In this month, the relevant dates are Friday the 19th (effective expiration of the option for trading purposes), Saturday the 20th (actual expiration of the option, assignments doled out randomly to option sellers), and Sunday the 21st (assignment reports/status typically available to brokerage customers).
-Rose- |
