Selling Put option and position becomes ITM. What are the chances of the buyer closing the trade?

[mrkanyebest 0]

 

Say I'm selling a put option that has 105 days to expiry. In the event if the market drastically goes south and my sell put position ends up in the money, what are the chances of my buyer closing the trade?

Ideally, I would like to wait out the 105 days to expiry and let time decay do its trick. But I can't do that if the buyer wants to exercise his right to buy and close the trade.

I've always been a seller of options, so would be nice to get a option buyer's perspective on this.

 

[Yowster 8,132]

10 minutes ago, mrkanyebest said:

what are the chances of my buyer closing the trade?

Early assignment risk is when the time value in you short put is only a few cents - so stock price needs to drop significantly below the short strike for this to happen.

[mrkanyebest 0]

 

6 minutes ago, Yowster said:

Early assignment risk

Thank you for introducing this term to me. I've always wondered what it was called. I've done some furthur search on this term and I've got my answer from stackexchange.

 

Per CBOE stats, only about 7% of options are exercised.

There are several reasons why an option might be exercised early:

• The owner doesn't know any better and throws away remaining time premium, not realizing that he'd salvage that time premium by selling the option. This is rare.

• The time premium is low and exit costs (commissions and B/A spread) are lower than selling the option. This is an infrequent occurrence because most firms charge for exercise, sometimes more than a simple sell commission.

• An ITM option trades at a discount (the bid is less than the intrinsic value) and selling to close would be a haircut. Taking the opposing position in the underlying and exercising the option would avoid the haircut. This discount occurs regularly but even more often just before the ex-dividend date. 

 

[Kim 7,638]

3 hours ago, mrkanyebest said:

 

Thank you for introducing this term to me. I've always wondered what it was called. I've done some furthur search on this term and I've got my answer from stackexchange.

 

Per CBOE stats, only about 7% of options are exercised.

There are several reasons why an option might be exercised early:

• The owner doesn't know any better and throws away remaining time premium, not realizing that he'd salvage that time premium by selling the option. This is rare.

• The time premium is low and exit costs (commissions and B/A spread) are lower than selling the option. This is an infrequent occurrence because most firms charge for exercise, sometimes more than a simple sell commission.

• An ITM option trades at a discount (the bid is less than the intrinsic value) and selling to close would be a haircut. Taking the opposing position in the underlying and exercising the option would avoid the haircut. This discount occurs regularly but even more often just before the ex-dividend date. 

 

This is pretty much correct. Theoretically, you can be assigned at any time by someone who "doesn't know any better" and giving up all the time value. If and when this happens, it would be a gift. Realistically, the assignment risk becomes high when time value becomes really low. And for the record, anyone who is long the option can exercise it at any time.

[johnny.dollar 6]

Is it possible to close a short position after early assignment occurs?  Example: a naked call expires in 3 weeks, but for some reason gets early assignment. Is one still allowed to buy a call to close the position, or must one continue through with the assignment process?

[Kim 7,638]

8 minutes ago, johnny.dollar said:

Is it possible to close a short position after early assignment occurs?  Example: a naked call expires in 3 weeks, but for some reason gets early assignment. Is one still allowed to buy a call to close the position, or must one continue through with the assignment process?

If you are assigned, you are not short the calls anymore - instead, you are short 100 shares for each call you were short. What to do with the short shares is up to you, you can close the position anytime.