I’ve heard that this was a risk, but usually the story is that it your option is exercised early because the price is running up. I just got email that my out of the money (by some tens of cents) covered call was exercised on expiry!!?? Why would ANYONE choose to buy my shares at $9 when the market price was $8.80?
So weird. Guess I made extra on that one. Been doing this for over ten years now and never seen it before.
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It could have been in the money at some point during the day. If that’s the case, the person on the other side might have exercised manually, and then you got matched as the counter party in overnight processing.
Another possibility — the other person could have been using the option as a hedge against a short position. After considering all costs, spreads, and fees involved, exercising a really close to the money option could have been a cheaper way to close out the position than trying to close out each part manually. Especially if there’s an ex-dividend date involved as well, there are edge cases where that could be the lower total cost way to close things out.
Yet another possibility — the person on the other side misclicked and exercised when he or she meant to sell.
One really squirrelly possibility would be if the person on the other side wanted to own the stock at the higher basis price of their option premium plus the exercise price. In a world where some transactions are made with tax considerations as a priority, there might be a case where having a higher basis might be seen as a better outcome than having an immediate loss from the expiring option and a lower basis price on the stock. For instance, if the person expects a low income year this year and wouldn’t benefit from taking the loss this year but anticipates a higher income year in the future where the higher basis would come in handy…
Any way you slice it, it’s an extra $0.20 per share ($20 per contract) for you.
Regards,
-Chuck
Home Fool
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I didn’t think your stock could be called out unless the stock price went above the strike price so this is an interesting read here. Do you know if the stock went above your strike during the afterhours market? Thanks for posting this…doc
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It was above during the day, but it started dropping after noon’ish. I expected it to be low enough to not worry about it. But, this was a position I am ‘playing’ as it is super volatile, so I am not worried about my long-term position here.
Def a weird thing to see happen.
American style vs European style?
{American and European options have similar characteristics but their differences are important. Owners of American options may exercise at any time before the option expires. European options can only be exercised at expiration.}
More at link.
I’ve heard (told in an options workshop, 20 years ago) that occasionally an OTM contract, on a dividend paying stock, will be exercised when the dividend is sufficient to be attractive to the option BUYER/owner.
The comment was something like -
"in American style, the owner can exercise anytime up to expiry. At his discretion. He owns the "legal rights “. Etc.”
IDK if that explains the OP situation or not.
About 2 weeks ago, I had 2 Put contracts on PLTR assigned. They were OTM from what I saw.
It was a first for me.
I’m now selling Covered Calls on em. Ie the Wheel Strategy.
ralph
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Not sure about European style options but American style option can be exercised at any time up to expiration. It usually happens just before a dividend is paid to collect the dividend.
The Captain
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Be VERY careful to instruct your broker WHICH shares should be used to deliver!!! Otherwise, you could have some capital gains surprises.
It’s not that weird. The person holding those options may have known that they won’t be available to trade between 12 and 4, and therefore had to make their decision at noon before they became unavailable.
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Retirement accounts, so no way to select which shares, and also no capital gains taxes.
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Ah, yes, in most cases (almost all), inside a tax deferred (or tax free) account, it doesn’t matter.