馃攳
Extrinsic Value & Option Assignment Risk - YouTube
Channel: Trader Talks Webcasts from TD Ameritrade
[0]
hello investors so as option sellers we
[3]
are frequently primarily interested in
[5]
selling an option to collect that option
[7]
premium perhaps we sell a cover call
[9]
against an existing position again
[11]
primarily interested in collecting the
[13]
premium and not necessarily selling our
[15]
stock for this reason it's important for
[19]
investors to be aware of the different
[21]
kinds of assignment risks there are
[23]
there are three key assignment risk
[26]
areas to be aware of one is in the event
[29]
the option expires in-the-money secondly
[33]
is in the event that an upcoming
[34]
dividend is greater than the extrinsic
[36]
value of the option and finally in the
[40]
event the upcoming dividend is greater
[42]
than the at the money put premium in
[45]
this video we're going to talk about the
[47]
situation where the upcoming dividend is
[49]
greater than the extrinsic value of the
[51]
option links to the other two videos can
[53]
be found right here what exactly happens
[57]
when an option is assigned with regards
[60]
to a call option the call option buyer
[61]
exercises their right to buy the stock
[64]
of the option contract price also known
[66]
as the strike price now the seller of
[68]
that call option is then obligated to
[71]
sell the stock at that strike price this
[73]
is sometimes referred to as getting
[75]
called out with put options the put
[78]
option buyer exercises their right to
[79]
sell the stock at the option strike
[82]
price while the seller that put option
[84]
is then obligated to buy the stock of
[86]
the strike price this is sometimes
[87]
referred to as having the stock put to
[90]
you because sellers of options may not
[92]
want to buy the stock or sell the stock
[94]
through assignment it is helpful to know
[96]
when assignment becomes more likely and
[98]
how to avoid it if necessary and again
[101]
in this video we're going to talk about
[102]
that situation where the upcoming
[104]
dividend is greater than the extrinsic
[106]
value of the option
[109]
what exactly is extrinsic value an
[114]
options value is made up of two parts
[116]
the intrinsic value which is the profit
[119]
that would occur by exercising the
[121]
option and the extrinsic value which is
[124]
the difference between the options cost
[127]
sometimes refer to as the premium and
[129]
the end and the intrinsic value let's
[132]
look at an example
[133]
let's say a call option has a premium of
[136]
$5 the call option strike price is $50
[140]
the stock is currently trading at $52
[143]
the buyer of the option could exercise
[146]
their right to buy the stock at $50 then
[150]
sell it in the open market for $52 for
[153]
profit of $2 that $2 is the options
[157]
intrinsic value the premium on the
[160]
option here is $5 if we take that
[163]
premium and we minus from that the
[166]
exercise profit of $2 then we have the
[169]
extrinsic value and in this case it
[171]
would be $5 premium minus the $2 of
[175]
intrinsic value gives us $3 of extrinsic
[178]
value why would an upcoming dividend
[182]
that's greater than the extrinsic value
[184]
increase the likelihood of assignment if
[188]
the option buyer exercises they own the
[192]
stock thus maintaining their intrinsic
[194]
value in other words if the price of
[196]
stock goes up their underlying position
[198]
benefits by the amount of goes up the
[200]
underlying position goes down then their
[202]
underlying position gets hurt by the
[204]
amount of goes down similar to the
[206]
option so with regards to the intrinsic
[208]
value if they exercise that call option
[210]
and buy the stock they maintain the
[212]
intrinsic value however now that they've
[214]
purchased the stock they now have rights
[217]
to the dividend and if the dividend is
[219]
greater than the extrinsic value then
[222]
the total value of that exercise
[223]
position is now greater than the
[226]
original option position here's a table
[229]
to help explain so let's look at the
[231]
position values both before assignment
[234]
and after assignment before assignment
[236]
we have the option in this case we're
[239]
talking about call options that call
[241]
option has the intrinsic value again
[243]
which is the profit of buying the stock
[245]
at the strike price and then selling it
[247]
at the market price in addition to that
[249]
we have that call options extrinsic
[251]
value which is the difference between
[253]
the current premium and the intrinsic
[255]
value after the assignment we own the
[258]
stock now because we own the stock we
[261]
still have that intrinsic value because
[263]
we've purchased the stock of the strike
[264]
price we can turn
[266]
around and sell at the market price but
[268]
now rather than having the extrinsic
[270]
value we now have the dividend and when
[273]
this dividend is greater than that
[275]
extrinsic value the exercise position is
[278]
greater than the option position so
[283]
investors how do you avoid assignment in
[285]
these types of situations one of course
[288]
is to avoid positions where the dividend
[290]
is greater than the extrinsic value and
[294]
secondly consider closing out positions
[297]
when the declared dividends are greater
[300]
than the extrinsic value well thanks
[303]
everyone for joining us for this video
[304]
again links to the other two videos in
[307]
this option assignment series can be
[310]
found right here thanks everybody and
[312]
hope to see you on Twitter on Twitter I
[314]
do post things related to this area as
[316]
well as other areas of investing my
[318]
twitter handle is at k ro s e
[321]
underscored t da
Most Recent Videos:
You can go back to the homepage right here: Homepage