Options Trading Options Exercise and Assignment 2

Question 1

Which of the following is the most common reason a call option holder might exercise early?

Accepted Answer

To capture an upcoming dividend on the underlying stock

Answer

Early exercise of a call option can be rational when an upcoming dividend is large enough to exceed the call's remaining time value, making it economically beneficial to exercise and collect the dividend.

Question 2

What does 'pin risk' refer to in options trading near expiration?

Accepted Answer

Uncertainty when a stock closes exactly at or near the strike price at expiration

Answer

Pin risk occurs when the underlying stock closes very close to the strike price at expiration, creating uncertainty about whether enough in-the-money options will be exercised to trigger assignment.

Question 3

Which of the following statements about assignment is most accurate?

Accepted Answer

Only in-the-money options are typically exercised and result in assignment

Answer

Rational option holders only exercise options that are in-the-money, since exercising an out-of-the-money option would result in an immediate loss.

Question 4

What is the OCC's typical deadline for option holders to submit exercise notices on expiration day?

Accepted Answer

5:30 PM ET after the market closes

Answer

The OCC deadline for submitting exercise notices on expiration day is typically 5:30 PM ET, though individual brokers often have earlier internal cutoffs.

Question 5

Why is the ex-dividend date important to options traders managing short call positions?

Accepted Answer

It is the date after which buyers no longer receive the declared dividend, making early call exercise more likely

Answer

On and just before the ex-dividend date, call holders may exercise early to capture the dividend, increasing assignment risk for short call sellers if the dividend exceeds remaining time value.

Options Trading Practice Test

Options Trading Practice Test

Options Trading Options Exercise and Assignment 2