I’ve heard these kinda things could happen, but this is new to me. I had a PUT on SoundHound for $10. It was in the $9.50 range by close of trading on Friday, but it seems to have just expired.
Interesting. (At this time, I wasn’t really hoping for the shares, just working to make a little extra during volatility.)
I thought they expired at the end of trading on Friday so they should have given you the shares.It is still below $10 now. That is strange. I wonder is it has to do with the short interest on the stock. Seems rather high.
You sold a $10 put expiring on 5/9/2025. The stock closed at $8.98 on that day. That means that the put was in the money. Why would anyone in their right mind not exercise a $10 put when they could buy the stock for $8.98 and sell it to you for $10? Well, I can think of one reason. Since the trade settles on the next trading day, Monday (today), if they knew somehow that the stock would pop to $10.70 on Monday, and that they would be better off NOT selling it to you at $10, and instead selling at $10+ on Monday (right now it is trading at $10.70), they might let it expire worthless and instruct their broker to NOT automatically exercise it.
My broker will automatically exercise any option that is in the money by at least $0.01. In fact, before my options expire, I usually get an email from them to that effect. Oddly enough, since most of my options are “short” (I wrote and sold them), I still get that email from my broker.
So, you gained a little on that option that wasn’t exercised. You got to keep the entire premium and didn’t have to buy stock at $10. But had that option been exercised, you would have bought stock this morning at exactly $10 and could have sold right now at $10.70 for more gain.
Now, how did they know it would pop on Monday? I wonder when the instruction to NOT automatically exercise have to be sent to the broker? Maybe after some news came out that would indicate a pop? But even in afterhours trading on Friday, it never traded much above $9. Very odd.
I think it is more complicated than that. The market makers are matching the options and since they had a high short interest and more people needed to cover they bought the stock back forcing the market maker to take dlbuffy shares to cover the short interest.
I’m quite sure it is. Because that’s how markets work. However, the market makers knew exactly what the open interest was in that option on Friday afternoon. And the stock was trading rather robustly (43 million shares traded) that day. So if they needed shares, they could have easily bought them, even if they had to bid above $9 for them. But the whole thing doesn’t make sense in any case, short interest or not. Because market makers rarely exercise options, they usually just sell them when then there is still some value in them. And there was a relatively good bid/ask on these options (not a super tight bid ask, but still a reasonable one with sufficient liquidity). For some reason I can’t see what the ending open interest was on Friday!
I understood that @dlbuffy SOLD the option, and therefore didn’t have any obligation regarding shares. The person who bought the option (via a market maker) had the option, but the not the obligation, to exercise that option. And they chose not to, despite the fact that the shares closed at $8.98 while the option had a $10 strike price. They could have easily bought the shares near the close for about $9 (there was way more than sufficient trading in the shares at the time) and then exercise the option and sell those shares for $10 (to @dlbuffy had they been assigned).
There was no short squeeze going on during Friday trading. Heck, even today in the premarket, you could have bought shares under $10 rather easily. Only at 9:30 when regular trading opened did the shares begin to pop above $10.
I think they were looking at the implied volatility. I have sold a lot of puts and have never had what happened to DLbuffy happen. Usually on Saturday my options are always settled. We are not even experiencing high volatitlity but that is the only thing I can come up with.
Same. I sell puts almost every month in an effort to increase the size of stock positions that I like, but at slightly lower prices. But mostly I do it for fun because I’m retired and have time to play. I’ve never ever, not since the mid 80s when I started trading options, had an option that was in the money not exercised and assigned. I did experience, twice so far, an option out of the money being exercised and assigned.
Even if they were looking at implied volatility, and even if it was very high (I’m pretty sure it wasn’t very high, but even it it was), as the option approaches expiry, the implied volatility becomes meaningless, and upon expiry it [obviously] becomes meaningless.
Maybe it’s just a glitch of some sort?
Could be, I think I would talk to my broker and see what went wrong.
Not really. This is a particular scenario I think I discussed may be with you or someone in the past. It happens. Not necessarily in very liquid and large number of shares.
Say I own 1000 shares of xyz company, and I wanted to protect my shares, so I bought $10 put, now the shares are 9.85 at expiration. I have a following choices..
The assumption that all options are owned by market maker is incorrect. The options are purchased or sold for a specific goal. So if you want to acquire shares, especially when the price is closer to the exercise, I would close and buy the shares.
He is selling Puts I thought. So he was obligated to buy the shares.
I am talking about the other side of his trade. Why someone may not exercise their bought puts…
But since he has a contract, and he sold the puts I don’t see how they can tell him he doesn’t get the shares. He met all the requirements of the trade already. Somebody can’t just decide to back out of the trade. I would want an explanation from the broker. Let’s say he sold puts at 10 dollar strike and on friday, end of trading period, it was 9 dollars. Then over the weekend, news came out they sold the business for 20 dollars a share. If I sold those puts I would definetly want my shares.All contracts settle T+1.
Options 101. When you sell a contract, you have the obligation to fulfill the contract. When you buy a contract you don’t have that obligation.
In simple english, by selling the puts he is obligated to buy, but he doesn’t get to buy.
Of course they can. You can go and ask your broker, they will be saying the same. When you sell you don’t have any rights… you are selling your rights.
That makes no sense Obligation means compel as you are compelled to buy the shares.
You are signing a contract to fulfill your obligation. Of course you have rights otherwise you could refuse to take the shares and pay the money for the shares. Obligation isn’t just one sided.
** A broker cannot refuse to deliver shares upon the expiration of a sold put option if the put is “in the money” (meaning the stock price is below the strike price of the put) and the seller has not closed out their position. If the put is not in the money, it will expire worthless, and no shares need to be delivered. Brokers can, however, implement a “do not exercise” (DNE) instruction, which essentially prevents the automatic exercise of a put option that is in the money, according to Charles Schwab. They might do this if the account has insufficient buying power to meet the obligation.
Here’s a breakdown of the scenario:
When you sell a put option, you’re obligated to buy the underlying stock at the strike price if the option is exercised.
If the stock price falls below the strike price before or on the expiration date, the put option becomes “in the money” and can be exercised.
The broker is responsible for fulfilling your obligations under the contract, including buying the shares at the strike price if the option is exercised.
Brokers can submit a DNE request to the Options Clearing Corporation (OCC) if they can’t find sufficient buying power in your account to cover the purchase. This prevents the automatic exercise of the option.
If a DNE is successful, the option expires worthless, and you don’t have to purchase the shares.
If the put is exercised and you don’t have sufficient buying power, the broker may sell other positions in your account to cover the obligation. They may also attempt to buy the shares on your behalf if they have the funds, according to Investopedia.**
Now the question Dlbuffy, did you have enough money in your account when the puts were being exercised? That could be a possiblity. When I sell puts I have to leave an equal amount of money in cash.
Hi @buynholdisdead,
Seems like the nature of the option Buy/Sell has been lost here.
When OP sold the options, the Buyer has the RIGHT to Assign the shares or Not. The Buyer of the option is not obligated to Assign the shares.
The Seller has no Right to Refuse. The Seller made a Contract and must abide by it. The Seller is not in “the driver’s seat”, so to speak.
Between Calls and Puts, the Rights and Obligations are reversed but still operate the same.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
What??? When you sell a put, or write a put contract, you are promising to buy the stock at the strike price, until expiry (except for american style options, which are special types).
The person who buys the contract, has the option to exercise or not. They are not obligated to anything. They own a right that they may or may not chose to exercise.
This is basic options 101. If you are not clear on this, then you should not be trading in options.
It is. Let me give you a simple example. You buy insurance for your car. When you are in an accident, if you file a claim, Insurance is obligated to pay the claims. But you are not mandated to file a claim. You can choose to not file a claim.
This is for the person who is selling the options.. not for the person who is buying.
You are unclear on the basics and all of your argument stemming from that incorrect assumptions are wrong. You need to take options 101.
Ok Thanks Gene that makes.
Can you explain this from Schwab then?
King you told me to go ask my broker and I went on Schwab’s site. This is what they put out. I think you are getting a little excited about a simple discussion. Can you explain this from my Schwab account.
[** ** A broker cannot refuse to deliver shares upon the expiration of a sold put option if the put is “in the money” (meaning the stock price is below the strike price of the put) and the seller has not closed out their position. If the put is not in the money, it will expire worthless, and no shares need to be delivered. Brokers can, however, implement a “do not exercise” (DNE) instruction, which essentially prevents the automatic exercise of a put option that is in the money, according to Charles Schwab. They might do this if the account has insufficient buying power to meet the obligation.**
When you sell (“write”) an option, someone buys it (yes, yes, via a market maker, but effectively they buy the contract). The person who bought the option contract has the right, but not the obligation, to exercise that contract. If it is a put, they have the right, but not the obligation, to sell you 100 shares at the strike price. If they exercise that right (it is literally called “exercising the option”), then you have to pay 100 x strike price to them, and they then deliver 100 shares to you. In practice, because we use exchanges to trade options, when owners of options exercise them, the person chosen to have their option exercised is done randomly. That is what is called “assignment”, you, the seller of that option, are literally assigned to deliver on the contract you sold. For example, right now I own some Disney shares that I purchased a few weeks ago (on April 17th) when the 90 strike puts that I sold were exercised and assigned to me. Those shares were delivered to me on 4/21 and I paid exactly $90 for each of them … per the option contract that I sold.
If it is a call, and if you are assigned, you have to deliver 100 shares (per option contract) and you will receive the strike price for each of those shares. For example, last week, after DIsney stock popped 10+% after earnings, I sold some 105 strike calls. My reasoning was that I am willing to sell those shares at a net of 105+premium that I received for those options. I’ve done this trade with Disney before, when Iger returned, there was a similar pop, and I earned a similar profit on the trade.
At most (all?) brokerages, if you sell puts in an IRA, then they reserve (lock up) the total amount of cash required to buy those shares. For example, right now in one of my IRA accounts, I have some Apple 130 puts that I sold a year and a half ago. That account has $13,000 reserved (locked up) for each contract that I sold. The reason the brokerages do that is precisely so there is never a scenario in which they have to give you margin in a tax-deferred (or tax-free) account. You HAVE TO have the cash available. Now the cash just sits there, but you do earn interest on it. In my case, I usually wait for such sold puts to expire worthless (if I recall correctly, this one expires in the middle of next year), but if I want to do something with that reserved money, I would have to buy those puts (“buy to close”) and then the $13,000 per contract is immediately released so I can use it for whatever I want. Similarly, if you want to sell calls in an IRA, you have to hold the stock in that account in case you need to deliver it. And as long as those sold calls are outstanding, those shares are “locked” and you can’t sell or transfer them. But you do receive any dividends they may distribute in the interim.
Oh, and last thing, European options are a little different that USA options. But only a little different. USA options can be exercised at any time between the purchase of the option and the expiration of the option. European options can only be exercised at expiration. However, while this sounds like a big difference, it really isn’t such a big difference, because it is almost never economically rational to exercise an option early because you could sell the option instead and net have more money. That’s because options always have a some time value in them until they expire. For example, BRKB closed at 514.30 today, and there are some 512.5 strike options that expire in 4 days from now. Someone who holds those options could exercise today, and pay $512.50 per share which is about $2 less than what it is trading at today. BUT, that makes no sense financially! Instead they could buy the stock directly at $514.30 and sell the option they hold for $3, which results in a net price of $511.30 which is better than the exercise price of $512.50. In general, USA options are rarely exercised before expiration. There is an exception for stocks that distribute a meaningful dividend. Sometimes holders of call option will exercise them right before ex-dividend day in order to “swipe the dividend”, but even that is relatively rare. It’s only happened to me twice, and I’ve only done it once, over all the years.
I’m pretty sure that the cash is delivered on the same day that you have to deliver the shares when you exercise a put you owned. And you would only exercise it if it made economic sense (i.e. it ended “in the money”) so usually the price would be lower than the cash you received. But that’s why I asked the questions earlier:
Now, if the shares spike on Monday morning before you can buy the shares, then it is indeed possible that you don’t have enough money to buy those shares. But that wasn’t really the case today. In the premarket, you could have bought shares for under $10 (the strike price) very easily. And even right on the open, you could have gotten shares for $9.64.
It is a VERY incorrect assumption!!! The market maker wants to own as few as possible at any time. They make their money on the bid/ask spread, not by speculating on options. In fact, they prefer to be fully hedged as much of the time as possible.
That is the whole crux of the problem. Dlbuffy he sold an option for 10 dollars, he said at close on Friday the stock was at $9.50. Now somebody could recall that option up until expiration date and time. The option expires on Friday at 3:00 CST. After that the contract is executed. The settlement of the contract is T+1. Mine has always settled on Saturday. Maybe +1 could be the next trading day but that has never been the case with mine.
So nobody gets to execute on an option after expiration.
