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Midas

After Hours Trading effect on Strike Price

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Is there a documented rule on after hours trading and option strike prices? What I mean by this, is say after hours someone makes a rogue trade that sends a $100 stock to $250 for less than 2 minutes before immediately dropping  back in after hours trading to a normalized price of say $115. Will all options everywhere with up to a $200 strike price get triggered because the price crossed this threshold for a trade or two?  What's the rule on this?

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I guess to refine my question. It is my understanding that someone can exercise an option  early at anytime. My question is if the option strike price hits even for a brief minute during  after hours trading, is the option holder granted that price or only if his request is timed with the actual price spike during after hours trading. One person said it would be based off the closing price of after hours trading and I heard a different answer from someone else so I'm curious as to what the rule is?

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4 hours ago, Midas said:

I guess to refine my question. It is my understanding that someone can exercise an option  early at anytime. My question is if the option strike price hits even for a brief minute during  after hours trading, is the option holder granted that price or only if his request is timed with the actual price spike during after hours trading. One person said it would be based off the closing price of after hours trading and I heard a different answer from someone else so I'm curious as to what the rule is?

Options are ALWAYS exercised at the strike price, so a 100 strike option is procesed with a $100.00 stock price.    Regarding early assignment  - yes, you can exercise your option early but it isn't processed/settled until after the market closes (the stock price at the time you manually exercise doesn't matter as after the market closes your option will be settled based on it's strike)..   But practically, nobody is going to execute an option early unless the time value is nearly zero.   Think of it this way...   If you are long a 100 strike call with the stock price at $101 and your call is worth $2.00 ($1.00 of extrinsic value and $1.00 or intrinsic value).   If you sell the call you get $200 for it.   If you exercise your option early, you buy 100 shares of stock at at price of $100.00 - you wind up giving away the $100 of extrinsic value, and whoever sold you the call thanks you for giving away the $100 in intrinsic value.  If you wanted to buy 100 shares of the stock at that point in time, you'd be better off selling your long call for $2.00 and collecting $200 and then buying the stock at $101, your net cost to buy the 100 shares of  stock would be $10,100 (buy stock at current price) - $200 (proceeds from selling call) = $9,900.   However, if you exerecised your 100 strike call early, you'd pay $10,000 for the stock.

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@Yowster, thank you for your response, but I also have the similar question. Is there a link or document we can read how options are assigned at expiry? 

Let's say I sold a 100 call. Friday session on the expiry date closed at $99.90. During after hour session the price first spiked to $101.00 and then went down to $99.00. What will happen in this case? Will I need to sell the stock or keep the premium I collected?

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5 minutes ago, ixero@20 said:

@Yowster, thank you for your response, but I also have the similar question. Is there a link or document we can read how options are assigned at expiry? 

Let's say I sold a 100 call. Friday session on the expiry date closed at $99.90. During after hour session the price first spiked to $101.00 and then went down to $99.00. What will happen in this case? Will I need to sell the stock or keep the premium I collected?

In this case, I believe the option would not be automatically exercised because the stock price closed on Friday below the strike.   However, if the stock price moved above the strike in Friday after hours trading it very well could be manually exercised (this is why we will close shorts prior to them expiring), you have no way of knowing if the person who bought the call that you sold exercised it until you check your account to see if it was exercised over the weekend.

 

As for a document, I think you can do google searches and find something.

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Thanks for the response and yes I do understand this concept.  I'm really just trying to get a grip on all possible outcomes whether likely or unlikely. I've heard a few horror stories of people getting caught in random loopholes so I'm trying to figure out all the loopholes. I heard one person get caught in after hours trading on expiration day when the price peaked up and his option got exercised because options can be exercised up until 5:30pm eastern time during afterhours trading on expiration day. So I understand that you can get assigned in after hours trading on expiration day up until 5:30pm. Since the rule is you can exercise an option at anytime then clearly someone can in after hours trading on non expiration day. Since after hours goes until 8pm  what happens if someone puts in their request  to exercise their option at 4:45pm, how would that settle? Would it be based on whether the price hit the strike during after hours trading or would it be based off where the price closed in after hours trading?  I do understand extrinsic value however there are so many new options traders that the random occurrences seem to happen more and more so I want to get a handle on every possible even though not plausible scenario.

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4 hours ago, Midas said:

Since after hours goes until 8pm  what happens if someone puts in their request  to exercise their option at 4:45pm, how would that settle? Would it be based on whether the price hit the strike during after hours trading or would it be based off where the price closed in after hours trading? 

This scenario has absolutely nothing to do with the stock price, it's simply whether the holder of the option decided to exercise it.   For example, if you are short a 100 stike call and whoever you sold it to happens to exercise it then you will have 100 shares of stock that you own sold at a price of $100 per share (the strike), or if you don't own the stock then you'd be short 100 shares at a price of $100 per share - it doesn't matter if the current stock price is $95, $105, $125 or $200, your short strike was 100 so when the option is settled the stock is bought (if short a put) or sold (if short a call) at a price of $100 per share.   This is why options are not typically exercised until the time value in them is very small (so the strikes have to be deep in the money) - if people want to cash in on the profit, they'd usually just sell their long option and not exercise it.    If people exercise an option that still has a significant amount of time value remaining, they forego  that extra value when they exercise it (and this would be to the benefit of whoever sold them that option).   Bottom line is that when the owner of the option that you are short decides to exercise it then the settlement price at which the stock is bought or sold is equal to the strike and whatever the closing stock price was that day doesn't matter - and if somebody does exercise when there is a lot of time value remaining in it (I've never been lucky enough to have this happen to me) then they are doing you a favor and giving you all the time value still remaining.   If the owner of a long option is dumb enough to exercise it early when the stock price is near the strike price then their broker will still exercise it even if the stock price drops lower during that day or in after-hours trading.

 

Expiration day is a little different in that an OTM stike that becomes ITM in after-hours trading will likely be assigned.   This is why we always close short options for a few cents prior to expiration in the official SO trades - it's not worth that after-hours risk to let an option expire for zero instead of closing it for a few cents.

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Take a look: https://www.optionseducation.org/referencelibrary/faq/options-exercise#:~:text=As the holder of an,for receiving an exercise notice.

Options exchanges have a cut-off time of 4:30 p.m. CT, for receiving an exercise notice. Be aware that most brokerage firms have an earlier cut-off time for submitting exercise instructions in order to meet exchange deadlines.

So options holders cannot exercise their options after hours.

In any case, to avoid all the confusion and the "horror stories", we always close our short options before expiration. Trying to save the extra cents simply is not worth the risk.

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On 1/30/2021 at 2:02 PM, ixero@20 said:

@Yowster, thank you for your response, but I also have the similar question. Is there a link or document we can read how options are assigned at expiry? 

 

IB sent this out, this week:

 

Customers with Short Option Positions
If you are short the options, you may be assigned until 5:30 pm based on the decisions to exercise by other market participants. These traders will have the ability to see the current market price after the close of options trading, at a time when you will not be able to close your option position.

Again, these stocks may move significantly the after the close of regular trading at 4pm. This may mean that a position that was well out of the money at 4 pm may be in the money, perhaps significantly, by the time it is exercised against you. There is no way to predict whether the long holder of the option will exercise based on the 4:00 pm (16:00 price) or some later price up to 5:30 pm (17:30). The only way to avoid this volatility is to close out your short option position before 4 pm. To repeat, the only way to mitigate the uncertainty of your post-expiration stock position is to close out short positions prior to the end of the trading session.


Interactive Brokers Client Services

 

 

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