Performance
Different firms have different deadlines for receiving exercise notices from their customers. These deadlines may vary by option type and may also differ from the deadlines required by the clearing firm. The exercise deadline on the expiration date may also be different from the deadline before that date.
If the owner of an American option decides to exercise his right to buy (if he owns a call option) or sell (if he owns a put option) the underlying stock, he must notify his brokerage firm to submit an exercise notice to the Options Clearing Corporation. In order to ensure that the option is exercised on a certain day before the expiration date, the option owner must notify his brokerage firm before the deadline for receiving option exercise notices on that day.
Once the Options Clearing Corporation receives a notice from an option owner that he has decided to exercise, it will register the exercise notice in the name of a clearing member (for an investor, this is usually his brokerage firm) and assign it to another clearing member that has written the same option contract (but not covered). The Clearing Corporation randomly selects a company from the companies that meet this condition to assign. After the exercise notice is assigned to a company, the company must assign the exercise contract to one of its customers who has written the contract (but not covered). The method of assigning customers can be random or “first in, first out”. Which method is used depends on the company. You can find out from your brokerage firm which assignment method it uses.
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Assignment
The holder of a long American option contract may exercise the contract at any time before the option expires. Therefore, an option writer holding a short option contract may be assigned an exercise notice at any time before the option expires. If an option writer’s short option becomes in-the-money, then assignment on the contract should be expected, regardless of whether the option is a call or a put. In fact, some option writers holding short contracts are assigned options that happen to be at-the-money at expiration. This situation is usually unpredictable.
To avoid being assigned to a written option contract on a particular day, the position in the option must be closed out before the market closes on that day. Once the assignment notice is received, the investor has no choice but to fulfill his obligations under the terms of the contract. The option writer cannot specify a date as a priority date for assignment. There is generally no exercise or assignment activity for options that become out-of-the-money options on the expiration date. Option owners usually let them expire worthless.
What is Net Worth?
When an investor exercises a call option, the net price per share of the underlying stock paid is the strike price of the call option plus the premium paid for the call option. Similarly, when an investor who has written a call option is assigned an exercise notice for that option, the net price per share received is the strike price of the call option plus the premium received from the initial sale of the call option.
When an investor exercises a put option, the net price per share of the underlying stock received is the strike price of the put option minus the premium paid for the put option. Similarly, when an investor who has written a put option is assigned an exercise notice, the net price per share he pays for it is the strike price of the put option minus the premium received from the initial sale of the put option.
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Early performance/assignment
For call option contracts, the owner may exercise early to acquire the underlying stock in order to receive the dividend. Consult your broker to understand the pros and cons of early exercise of a call option contract. It is important to understand that the assignment of exercise notices may occur days or even weeks before the expiration date. This assignment is certain to occur if the call option becomes very high in the money as the expiration date approaches and there is a significant dividend payment. Call writers should be aware of dividend dates and the possibility of early assignments.
When put options become very high in the money, most professional options traders will exercise these put options before they expire. Therefore, investors who have short positions in these high-premium put options should prepare for the possibility of early assignment of these contracts.
Volatility
Volatility is the tendency of the market price of the underlying security to move up or down. It indicates the degree of price change. It does not imply a tendency for the price to change in either direction. Therefore, it is the main factor in determining option premiums. The more volatile the underlying stock, the more likely the option will be in the money, and the higher its premium. Generally speaking, as the volatility of the underlying stock increases, the premiums for its call and put options will also be higher. And vice versa.
