For investors who choose to use options, it is important to understand how to manage options positions, and that means understanding such topics as:
--When options expire?
--The process for exercising them..
--What it means if you have been assigned?
Management of Options
--Most people believe that 90% of options expire worthless. However, this is untrue.
--Normally, only about 30% of options expire worthless in each monthly cycle.
--Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration.
--In fact, over 60% of all options are traded out in the marketplace. This means that buyers sell their options in the market, and writers buy their positions back to close.
--When options expire?
--The process for exercising them..
--What it means if you have been assigned?
Management of Options
--Most people believe that 90% of options expire worthless. However, this is untrue.
--Normally, only about 30% of options expire worthless in each monthly cycle.
--Only about 10% of options are exercised during each monthly cycle, usually in the final week before expiration.
--In fact, over 60% of all options are traded out in the marketplace. This means that buyers sell their options in the market, and writers buy their positions back to close.
Exercising your options means that you buy the underlying stock if it is a Call option, or you sell the underlying stock if it is a Put option.
The following is the process for exercising a Call option.
1)The Call Owner:The call owner notifies the brokerage firm
2)The Brokerage Firm: The brokerage firm notifies the Options Clearing Corporation (OCC)
3)The Options Clearing Corporation(OCC):The OCC randomly chooses a brokerage firm with a short call position in the same class and series.
4)Assignment Notice:The brokerage firm then randomly calls one of its customers with a short call position, and gives an assignment notice informing the customer that a call owner has exercised the right to buy.
5)A Stock Transaction:A stock transaction has occured, and the brokerage firm credits the funds to the seller and delivers the share of stock to the buyer.
The obligations of Assignment:
When someone exercises their options and the process goes through the OCC, and the OCC notifies a certain brokerage firm that they are being assigned, that firm assigns those options to their customers who are short the same series as the exercised options.
If you exercise an XYZ December 50 Call, only writers of the XYZ December 50 Call could be assigned.
Writers of the XYZ December 40 Call, in this case, could not be assigned.
However, if you exercise this option, which is an option to buy 100 shares at $50 a share, you must have $5,000 ($50 per share x 100 shares) available to purchase the stock upon exercise in a cash account or equivalent buying power in a margin account.
If you are short this option and are assigned, you will get this cash credit, but you must deliver the stock.
NOTE: As an option writer (seller), you should always prepare yourself for the possibility of early assignment. Selling uncovered Calls involves unlimited risk.
The following is the process for exercising a Call option.
1)The Call Owner:The call owner notifies the brokerage firm
2)The Brokerage Firm: The brokerage firm notifies the Options Clearing Corporation (OCC)
3)The Options Clearing Corporation(OCC):The OCC randomly chooses a brokerage firm with a short call position in the same class and series.
4)Assignment Notice:The brokerage firm then randomly calls one of its customers with a short call position, and gives an assignment notice informing the customer that a call owner has exercised the right to buy.
5)A Stock Transaction:A stock transaction has occured, and the brokerage firm credits the funds to the seller and delivers the share of stock to the buyer.
The obligations of Assignment:
When someone exercises their options and the process goes through the OCC, and the OCC notifies a certain brokerage firm that they are being assigned, that firm assigns those options to their customers who are short the same series as the exercised options.
If you exercise an XYZ December 50 Call, only writers of the XYZ December 50 Call could be assigned.
Writers of the XYZ December 40 Call, in this case, could not be assigned.
However, if you exercise this option, which is an option to buy 100 shares at $50 a share, you must have $5,000 ($50 per share x 100 shares) available to purchase the stock upon exercise in a cash account or equivalent buying power in a margin account.
If you are short this option and are assigned, you will get this cash credit, but you must deliver the stock.
NOTE: As an option writer (seller), you should always prepare yourself for the possibility of early assignment. Selling uncovered Calls involves unlimited risk.
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