Say the 30-strike call is trading for $2.25 with the stock trading at $32.
If the trader exercises that call, he’s giving up that $0.25 of extrinsic value.
Or you bravely concoct Alfredo sauce with no recipe (’cause your mom could). Instead of guessing when you might get assigned on a short option position, let’s explore the science behind “early exercise” so you can potentially get ahead of the unexpected.
(And learn to put down the remote.)You know that an option gives you the right but not the obligation to buy or sell stock at a set price.
For example, if you exercise a long 30-strike call with 10 days to expiration and the interest rate is 2%, the interest would be ($30 x 0.02 x 10)/365 = $0.0164.
Note that the interest isn’t calculated on the ,000 the strike represents.Know how much the dividend is, how much extrinsic value your short calls still have, and the premium value of the corresponding OTM put.You can do it all on the Trade page of the thinkorswim platform from TD Ameritrade.In the case of a long put that isn’t being used as a hedge for a long stock position, you short the stock for a price higher than its prevailing price.You’ll only capture an (ITM) option’s intrinsic value if you sell the stock (after exercising a long call) or buy the stock (after exercising a long put) immediately upon exercise.If you don’t, you take on all of the risks associated with holding a long or short stock position.So, the question of whether a short option might be assigned depends on if there’s some perceived benefit to another trader exercising a long option that you happen to be short. When you’re short an option, you need to put yourself in the shoes of the person who’s long that option.That’s because you want that interest number to be in terms of the option’s price.Next, look at the price of the 30-strike put with 10 days to expiration.A trader would have to exercise that long call on the day before (or earlier than) the ex-dividend date to be eligible to receive the dividend.You should monitor your short calls closely, especially as the dividend date approaches.