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Unusual Options Assignment
Old 01-19-2011, 09:01 AM   #1
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Unusual Options Assignment

I was short (fully covered) some JPM 40-strike calls which expire Saturday (Jan 22). I was assigned this morning. JPM closed at 44.75 yesterday. For the life of me, I can't understand why anyone would have exercised these options early. No dividend was involved, as the ex-date was Jan 4.
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Old 01-19-2011, 01:02 PM   #2
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There is a person on the other side of the trade, they could have any reason at all to sell the call they bought. It doesn't need to be good reason. After all, since they bought it they have the 'option' of doing what they want.

Maybe they just needed the cash NOW.

You just happened to be the holder randomly selected to fill the order. I wouldn't look at is as very negative, you could just buy them back and sell next month's calls, if you want. What would you have done Monday if they were auto-exercised on Saturday?

-ERD50
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Old 01-19-2011, 01:52 PM   #3
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Originally Posted by FIRE'd@51 View Post
I was short (fully covered) some JPM 40-strike calls which expire Saturday (Jan 22). I was assigned this morning. JPM closed at 44.75 yesterday. For the life of me, I can't understand why anyone would have exercised these options early. No dividend was involved, as the ex-date was Jan 4.
You hardly ever hear about someone getting assigned before expiry.

Sounds like a trader got caught short too, maybe got a margin call, and had to exercise your covered call to cover themselves. But you would think that they'd be able to raise the cash by selling the option they held, not by exercising it.
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Old 01-19-2011, 02:28 PM   #4
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Maybe they just needed the cash NOW.
Not sure what you mean - they have to pay me $40 per share.

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I wouldn't look at is as very negative, you could just buy them back and sell next month's calls, if you want. What would you have done Monday if they were auto-exercised on Saturday?
I'm not looking at it as a negative. My plan all along was to deliver the shares if assigned (it was stock I wanted to sell anyway). The original trade was a straddle, so I made additional money on the short puts. Had the calls not gone deep ITM, I would have considered rolling them out another month.
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Old 01-19-2011, 02:30 PM   #5
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You hardly ever hear about someone getting assigned before expiry.

Sounds like a trader got caught short too, maybe got a margin call, and had to exercise your covered call to cover themselves. But you would think that they'd be able to raise the cash by selling the option they held, not by exercising it.
It's never happened to me before, except on the day before a stock was going to go ex-dividend, which I can understand. In this case, by exercising early, the call holder gains nothing while exposing himself to JPM dropping below 40 in the next couple of days, a small but not zero-probability event.
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Old 01-19-2011, 02:39 PM   #6
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Not sure what you mean - they have to pay me $40 per share.
True, it would seem easier to just sell the call, and take the cash. This way, they now have to sell the stock to get cash. I think that would take longer to clear (IIRC, options clear in a day, stocks 3?).

Same thing if they feared the stock would drop before expiry, just sell the call then, you don't want to own the stock.

Bottom line, I don't know why they would do this ( ? they needed the stock to cover another play ? - hard to picture that scenario) but it is their call to make. Could even be they don't know what they are doing.

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Old 01-19-2011, 02:40 PM   #7
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Originally Posted by FIRE'd@51 View Post
I was short (fully covered) some JPM 40-strike calls which expire Saturday (Jan 22). I was assigned this morning. JPM closed at 44.75 yesterday. For the life of me, I can't understand why anyone would have exercised these options early. No dividend was involved, as the ex-date was Jan 4.
This just happened to me last week for ATT as the underlying equity (also after the ex-dividend date of 1/10 I believe). First time it has happened early for me in 10+ years. I shrugged and moved on. I think I read that 85% of all calls expire unexercised, but I don't recall ever reading what portion of the 15% is exercised early. I assume it is very small.
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Early Exercise
Old 01-19-2011, 03:39 PM   #8
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Early Exercise

I had this happen with a position in ED last fall. I had sold calls on ED and the calls were in the money, but early exercise is known to be a bad idea in general. In my case, there was a lot of time value left in the options, too.
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Old 01-19-2011, 09:00 PM   #9
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I got assigned my CAT 80 calls last week. The stock has been trading around $90-95 for the last couple of months. I was attempting to buy back 1/2 of the outstanding options using limit orders but kept missing. I had large capital gains on CAT since bought the stock at $20 back in 99, so I have now erased my capital loss carry forward and the year has barely started.

I have had in the money calls exercised a few weeks before expiration about 1/2 dozen times over the last dozen or so years.
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Old 01-19-2011, 09:12 PM   #10
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Lots of putatative asset allocating rebalancers slumming over here in the options 'hood.
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Old 01-20-2011, 02:01 AM   #11
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Lots of putatative asset allocating rebalancers slumming over here in the options 'hood.

Hey, lots of people like to get some strange every now and again (insert '70s cheesy porno background music).
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Old 01-23-2011, 11:30 AM   #12
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I've had the early call fairly often over the years.
If you want to feel real pain, wait until you have had 4 called---each a separate transaction....
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Old 01-23-2011, 01:01 PM   #13
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so you guys do a lot of covered call writing? I was thinking about doing some of that in my Wells Fargo account since I have $150,000 or so invested in 10 dividend stocks. I don't like the high price they charge for option writing (and assignment) but I do like the free trades on equities! Perhaps if I moved the stocks over to optionshouse without liquidating them (I *think* you can do this), I too could start writing covered calls. It seems a nice way to get an extra % or two.

I just looked up the fee difference and it is pretty huge.

My wells fargo account is $9.95 + $1 a contract to write a covered call and $25 + something (not sure here) if you are assigned.

My optionshouse account is $8.95 + $0.15 to write the covered call and $5 for assignment.

It costs $95 to transfer stock out of wells fargo.

Hmmm...
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