Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: Saul Seinberg who wrote (3085)	11/27/2001 12:24:57 AM
From: BDR	Respond to of 5205

<<1) Will your own broker exercise against you if there is some margin left prior to expiration?>> By margin do you mean time premium? If so, probably not but as the time premium disappears, which happens as you get deeper ITM and/or as you get closer to expiration even if you are just slightly ITM, you are at greater and greater risk of early exercise. If you don't want your stock to be called away watch out in those circumstances. <<2) If the option is $0.75 ITM, then it seems the writer would have to buy back the options they're short, if they want to totally avoid a call from their broker. >> I believe that the OCC requires its members to exercise options that are .75 ITM at expiration to protect their clients (those that are long the options). The writer would have to buy the call back to avoid exercise and do that before the close on options expiration Friday. But you are also likely to get exercised if your written calls are .25 ITM and may get called if they are only .05. You or I might not be able to make money exercising a call that is just 3 cents ITM but the pros with little or no transaction costs may be able to. If you want to avoid being called and your stock is trading close to the strike on expiration Friday, you might want to close out the position even if it costs you .10 just to be sure you don't start the next week minus those shares. <<3) Is this topic... addressed in any of the current option books or on an option web site?>> Chapter 1, Page 17 of my 1993 copy of McMillan's Options as a Strategic Investment has a discussion of assignment. He highlights three situations when you can anticipate assignment: 1) A call that is ITM at expiration (He says even if the call trades ITM at any time during the last trading day you are at risk of being called out) 2)Option trading at a discount prior to expiration (That is, it has no time premium and is actually trading at less than the intrinsic value. Presumably this would be a brief aberration in pricing as it would normally not occur.) 3)The underlying stock pays a large dividend and is about to go ex-dividend Everything I have read indicates that if the call is ITM by any amount at expiration you should assume it will be exercised.Hope that helps.