Option assignment

toingpoing · #1 3rd December 2008, 08:53 PM

Can we have a discussion in detail regarding Option Assignment and how is it done.,for the benifit of all members .....

rkkarnani · #2 4th December 2008, 08:55 AM

Quote:

Originally Posted by toingpoing

Can we have a discussion in detail regarding Option Assignment and how is it done.,for the benifit of all members .....

Dont think there is much to discuss. Once an option holder opts for exercising his Call or Put, the Exchange 'assigns' it to an Option seller on Random basis. The Seller against whom the option is assigned is 'computer generated'.

Adheer · #3 4th December 2008, 10:46 AM

Quote:

Originally Posted by rkkarnani

Dont think there is much to discuss. Once an option holder opts for exercising his Call or Put, the Exchange 'assigns' it to an Option seller on Random basis. The Seller against whom the option is assigned is 'computer generated'.

Let us say, I sold a CALL for Rs 10 for company XYZ at strike price of Rs 100.

Now, the call is trading at Rs 12, and the underlying is trading at Rs 105. What happens if I get an assignment at this point ?

What is my net profit (or loss) in this case ? Is the call purchased back at the current market price (Rs 12) or is the position squared off based the In-The-Money value of the underlying currently Rs 5 ?

I am not clear on this squaring-off pricing mechanism. So, perhaps can anyone illustrate it correctly ?

AW10 · #4 4th December 2008, 04:24 PM

Settlement of Option assignment does not depend on current mkt premium/price of option.It uses the strike price and End of Day settlment price (which is generally the daily closing price of the underlying stock).

So when call holder of 100 strike price, excercises his rights to buy the stock at 100 Rs., the seller has obligation to give him stocks at 100 Rs. If he already has stocks in DMAT then it can paid directly. Else, he has to buy underlying stocks from mkt by paying CMP of 105 and give it to option buyer at 100 rs. and taking loss of 5 Rs.

Question is - will the call holder excercise his 100 strike option when CMP is 105. Because he has already 10rs for this call, then it makes sense for him to excercise only when CMP goes above 110. He would be better off sqauaring off the option at 12 and book profit of 2 Rs. rather then taking the delivery at 100 rs.

In general, if option CMP has any time value in it, it is better to square off the option and collect time permium that mkt is giving to that option. Excercise makes sense only when there is no more time premium left. (eg. in above example 105 option selling at 12, has 5 rs of real value and 7 rs of time value. Only a novice trader will make a mistake of loosing that 7rs of time value and excercise this option.).

In India, option excercise is Cash settled so there will be only debit/credit entries in your acct. It doesn't require any DMAT transaction. In US mkt, you would see the stocks entry in your trading acct as a result of option excercise/ assignment.

Another important factor comes is the type of option - American or European. American types of options can be excercised anytime but European option can be excercised only on expiry date.

Happy Trading

toingpoing · #5 4th December 2008, 09:20 PM

Thank you very much AW10,for the details.

The Following 3 Users Say Thank You to AW10 For This Useful Post:
rkkarnani (4th December 2008), terminator_123 (6th December 2008), vijsir (4th December 2008)

The Following User Says Thank You to toingpoing For This Useful Post:
AW10 (5th December 2008)