Lessons Learned - Option Assignment


Written on December 4, 2008 – 8:04 pm | by admin

Wednesday 12/3 was the ex-dividend date for BAC.  On Monday and Tuesday I sold some deep in the money calls ($2.50 strike) assuming that anyone buying these would not be exercising them on Tuesday for the dividend since the 2.50 strike had no premium and it would be just like buying the stock but with extra commissions.  What I didn’t know (and now do) is the option exercising process.

By 7pm CST, each clearing house must tell the OCC how many options were exercised.  The OCC then randomly decides how many each clearinghouse/broker is required to fulfill.   This happens no later than 1am CST.  Once the broker is given their allotment, they can use any fair and reasonable process for deciding which accounts to exercise.  The two main ways are first-in, first-out or just random.  My broker (Scottrade) uses a random method.

Once I knew this, I realized that my calls could be exercised by someone holding the Dec $2.50 since the middle of October and not just the account that I sold the option to on Mon/Tues.  Had I know this, I would not have done my BAC trades since the risk of getting called was much higher.  I thought this trade was too good to be true and it was.  It seemed too easy.

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