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Strategies & Market Trends : Calls and Puts for Income -- Ignore unavailable to you. Want to Upgrade?

To: Debt Free who wrote (4677)	10/31/2010 5:39:21 PM
From: Gottfried	Read Replies (1) \| Respond to of 5891

I've had naked puts exercised early, but no short calls

To: Debt Free who wrote (4677)	10/31/2010 6:17:40 PM
From: wilywilly	Respond to of 5891

You would just lose the dividend in your profit calculation if assigned early. In my experience, ITM calls with a decent dividend yield are very likely to be assigned the day before ex-div. I try to avoid that situation, as I write calls on LTBH stocks, many with low, low cost basis, so assignment means a big tax bill. Take the play and let us know what happens - I'll be curious.

To: Debt Free who wrote (4677)	11/1/2010 10:02:45 AM
From: kaka	1 Recommendation Respond to of 5891

Debt Free, re: 'Does anyone have any idea on how often that occurs and whether or not there is a high probability of that occurring ?' As a general rule, you should look at the cost to purchase a put at the strike of your short call in question to get an idea of dividend assignment risk. If the cost to purchase the put is less than the dividend, there is a good chance your short calls will be assigned. For example, take a look at the PFE options. The Nov 15 puts have an ask of .03. There is a very high probability that someone short the 15 calls will get an assignment since this figure is well below the .18 dividend. You have to consider this from the mindset of someone who is long the call. What would make them exercise their position to capture the dividend while providing them the same risk profile as the long call? If they exercise their long call they are long stock. They need now to be long a put since a synthetic long call is equivalent to long stock plus long put. If they can set up the same risk profile as their original long call for less money than the dividend, there is a high probability it will be done. The 17 strike calls you mention have a 17 long put cost currently of .19, so you're right on the cusp. Any further movement up of PFE and subsequent less expensive put price will increase the likelihood of early assignment on your covered call and assignment cost. As an aside, if the short call is naked and assignment leads to short stock, your account will be responsible for the dividend payout which you'll see via a debit to account. cheers,

To: Debt Free who wrote (4677)	11/1/2010 12:59:52 PM
From: Dinesh	Respond to of 5891

>how often [assignment] occurs One can watch for movements in open interest in a particular strike to get a sense of how often an early exercise takes place. If the OI is decimated, it's often because of early exercises. This is not foolproof as OI can also decline from the day's trading activity. But when the bid on a call shows nil or negative time value [Kaka's put-call-parity test], long call holders would be better off closing their positions via a cashless exercise than via open market selling-to-close. The OI test therefore provides a fairly reliable indication of the prevalence of early exercises. A better test formulation would be comparing the interest foregone on the dividend [between now and option expiry] against the time value remaining on the call. But this is pretty useless in our zero interest environment. Regards Dinesh