Not necessary Christian. The possibility is always there, espcially with many newbies, you never know.
If I am an option holder, it is advantageous for me to sell my position rather than exercise it. Why take control of the asset which I think it might decline (your observation)?
The dividends is probably the main reason why it could be exercised. If the time value of the option is less than the dividend to be earned, holding the underlying on the ex-dvidend date is probably the best reason to exercise it. This especially is the case in the expiration week.
If you have ANY short positions ITM and the ex-dividend date is in the radar, it might be worthwhile to check the time value on your short options - ie if you don't want to be assigned.
Again, exercise or not isn't 100% ...
Hope that helps.
Murthy
On Fri, Jul 10, 2009 at 8:44 AM, christianhgross
<christianhgross@yahoo.ca> wrote:
I want to throw out a question that might sound kind of basic, but I want to confirm what I am thinking.
Lets say that I am putting on a spread (regardless of the type) on a short time horizon (eg next expiry). If the spread is an American option then you run the risk of getting an exercise against you no? After all if the option is in the money and it looks like the market might drop I might be tempted to exercise and lock in profit.
However, if I base a spread on European options then I cannot have an execution against me since exercises are only possible at the end.
Please note I am not talking about Bermuda or other exotic options, and let's not get into the discussion of whether or not the exercise could or should happen.
Thanks
Christian Gross
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