*OT*
John,
First off, I am NOT an expert on options and it is hard for both of us to explain in detail a financial strategy in a few paragraphs when whole books are dedicated to it.... BUT, you wrote ..
My understanding is that it's put in a big pool on Sat morning and split up accordingly, so that if 1/2 the OCT 50's are actually called, you would be assigned to pony up 1/2 your stake.
It is my understanding that when calls are assigned they are assigned randomly, therefore, even if the call I sold is in the money, I might not get exercised. This policy might even vary by Brokerage house.
Obviously, if the stock closed at 55, everybody would be called away, even the guy who bought your call, because he would get the common at 50, and he could presumably sell Mon am at 55, recouping 5 dollars of the 6 1/4 that he paid you.
That is correct. BUT he could also just simply sell the call on the exchange instead of actually exercising the call. This way they sell to close and they lose money on the trade, but they lose less as opposed to having it expire worthless, because remember options are a "wasting asset", everyday that goes the time value premium withers away....
Another wholly fascinating topic is how one can close positions by either buying/selling the option or buying/selling the stock. Some investors will sell the stock short in order to close a "buy to open" call position if the option is not at "parity". For instance,
-you bought the Oct50 call @ 2.5
-at expiration the stock is @ 55 (so you are in the money and you definetely want to take your profit)
-Now you need to "sell to close"
-at this moment, let's say the Oct50 call is asking 4.75 and the stock is asking 55.
-Here you would want to sell the stock short @55 instead of selling the call @4.75.
-You now have technically shorted the stock @ 55 BUT you have the right to buy it back at 50 so you made 5 pts, AS OPPOSED TO selling the option @4.75 (you picked up an extra 1/4 pt because the option and the underlying stock were not trading at parity).
Lastly, and most interesting to me (and a topic of great debate), is that when a stock has moved higher during the option trading period and many traders have "in the money" calls, as we approach options expiration, these same traders will need to close their winning positions. This is the reason, IMO, you can see downside pressure on the stock, because they are "selling to close" and if at any time the options or common are not trading at parity, arbitragers will come in and take this "riskless" trade" and drive them back to parity therefore creating downside pressure on the underlying common.....
Not very elegantly stated, but fascinating to me nonetheless.
Regards,
MileHigh |
