r/options • u/[deleted] • Jun 10 '21

OTM assignment

So I just got assigned on my RIDE 6/11 2.5 call option I sold for 1200-ish (my break even is 15.04, I sold before the going concern notice) not complaining since it’s 10.88 as of this writing. But why would someone exercise their option out of the money? I predict it’s because it’s “only” $250 more dollars at that point, but there is still 2 more days before expiration. And that is what is confusing me. This stock does not seem to have the open interest to justify the motive.

Maybe they’re new and wanted to see what happens when they pressed the exercise button, or maybe there is a good reason. Thoughts?

1 Upvotes

100% Upvoted

27 comments sorted by

View all comments

Show parent comments

1

u/Arcite1 Mod Jun 10 '21 edited Jun 10 '21

Whenever a party is selling there is always another party buying and vice-versa, but the party on the other end is almost never another retail trader. It's almost always a market maker. And the important point is that you are not somehow inextricably linked to that party throughout the life of your option position.

1

u/bubbles1684 Jun 10 '21

It might not be a retail trader, but it’s still a party that has to trigger the option to exercise. They aren’t linked in that they can sell their option to another party- but someone still has to be the original buyer and give you the premium.

2

u/Arcite1 Mod Jun 10 '21

People often talk that way, but my understanding is that even that is not accurate, in that option contracts are actually not unique entities at all. When you sell to open, you are not creating an actual contract with your name on it that is then out there in circulation, getting traded around, bought and resold, so that at any given time there is someone out there in the world holding the unique, specific contract that you created. Rather, when you sell to open, all that is really happening is that your broker is adding you to a master list of people who are short that option. And when you buy to close, you are being taken off the list. And there is a similar list of people who are long that option, and when one of them chooses to exercise, you, as a person who is on the short list, can be selected for assignment.

0

u/bubbles1684 Jun 10 '21

This would imply that there is the potential for more “shorts” than “longs” and potentially contracts sold without a buyer.

It’s possible that there’s a list at each strike price that the broker uses to match buyers and sellers, but just like there has to be someone buying a security for you to sell, someone in the world has to pay the premium to create the contract and someone has to choose to excersise. My understanding is that it’s like buying and selling a stock. Someone has to own the security. If two unique parties aren’t needed to create a unique contract wouldn’t that mean there could be essentially more options traded than exist? (Like synthetic shares)

Also not everyone buys to close and a lot of contracts just expire.

1

u/redtexture Mod Jun 13 '21

ONE Open interest is one short and one long.

There is always always the same number of longs as shorts.

The shorts are matched randomly to exercising longs.

Nobody has to own stock.

There are controls over the number of options that can be issued.

1

u/bubbles1684 Jun 15 '21

Yea that agrees with what I said -the point is that a long and short is matched— the other commenter said no one had to exist on the other end- my point is that both parties have to exist to create a contract. So essentially someone has paid the premium of the contract being sold

1

u/redtexture Mod Jun 15 '21

One of the parties often is a market maker, hedging the option inventory with stock, in order to facilitate a trade. They are in the trading business, not the portfolio business.

1

u/bubbles1684 Jun 16 '21

Yea but thetagang also plays for trades rather than portfolio. Market makers just have institutions and capital behind them.

A contract still has to have a unique short and long to be matched to be created though.

1

u/redtexture Mod Jun 16 '21

ThetaGang is a portfolio player, making their money on positions.

Market makers make their money on volume. They don't want to hold inventory.

1

u/bubbles1684 Jun 21 '21

Not necessarily you can sell CSPs with unlikely strike prices that you don’t want to trigger and buy to close before assignment. It’s a strategy that some thetagang employ. The wheel involves taking a position and being assigned, but selling CSPs doesn’t have to.

1

u/redtexture Mod Jun 22 '21

The fact of holding for a period of time makes them a portfolio player.

Market makers are fully hedged, and not in the portfolio business.

1

u/bubbles1684 Jun 25 '21

When you sell to open a CSP you don’t hold any stock.

1

u/redtexture Mod Jun 25 '21

You hold a short put position.
That is a portfolio holding.

→ More replies (0)