3 replies to this topic

[arbman]

Let's say you have two different short put option positions at different strikes that come into the money against a short position on the expiration day, if stock closes below 100; 1000 Short Stock from 140 1000 Short Put at strike 100 500 Short Put at strike 120 So as the short puts will come into the money, the result will be long stocks of 1500 which will buy back 1000 short stocks. Which short put position would cover the short position; 1000 short puts or 500 short puts or average price of the two??? So, after the assignment, what will be the average price of the 500 long position? (so the question is which short lot has priority over the other, the higher deeper in the money strikes or lower speculative strikes or neither of them) Anyone ever had this? The opposite is also true if the stock closes over 140; 1000 Long Stock from 100 1000 Short Call at strike 120 500 Short Call at strike 140 What would be the average price of the 500 short stock after the assignment? Thanks in advance...

Edited by arbman, 12 December 2013 - 12:18 PM.

[K Wave]

You can pick your lots... So, to keep it simple, you could offset the 1k positions against each other and be long the 500 at 120. Or do it any other way you like.

[arbman]

I am thinking I would want to take the profits at the higher strikes and be long from the lowest prices possible so that any bounce would also make the assigned position profitable as well. I would collect the short premium, close the positions profitably and have a high chance to make a profit from the newly assigned position. So, I would want the deeper in the money positions to be assigned first and so on... Thanks for the info.

Edited by arbman, 12 December 2013 - 12:31 PM.

[arbman]

So the answer I got from the exchange (CME) for the futures options assignment is that it is completely random. We suggested that the higher strikes for puts and lower strikes for calls should be assigned first to reduce the account volatility and it also makes the most sense for trading purposes (as I explained above). Given the higher put strikes come into the money first as the prices decline and the lower strikes come into the money when the prices advance, this also makes more sense naturally too.