0

When call options expire ITM, the shares either need to be transferred (from an existing owner) or bought at the market price. I'm wondering whether this affects the stock price post-expiration?

The effect of uncovered call options? It seems to me that it can be reasonably assumed that not all shares leveraged by call options are covered, & therefore some will need to be bought in order to cover following expiration. So then assuming the same being true for puts, when the number of uncovered calls exceeds the number of uncovered puts, does the stock price increase?

Market maker's hedging? Or is this something that would be cancelled out ahead of time by market makers using a strategy such as delta hedging?

I would appreciate any clarification on these topics.

1

I can't give you a sourced factual answer since I'm not a market maker, the CBOE or a professional. However, I can provide some info for forming an opinion.

OK, one fact. The last CBOE stat that I saw indicated that only about 7% of options are exercised. About 70% are closed before expiration and as an aside, debunking the myth that people should sell options because most of them expire worthless.

Consider some possibilities:

  • If the short calls own the shares, shares are simply transferred between counterparties.

  • If the short calls want to be short the stock, there's no purchase of shares to offset the assignment.

  • If the ITM call was part of a vertical spread and both legs are ITM, there's an offsetting buy and a sell of shares.

  • Offsetting all of this in a mirror fashion is what's happening on the put side, offsetting call assignments to some extent (net buying/selling of the underlying).

From the retail side, there's no way to know if there's net buying or net selling of shares when calls expire ITM. My guess is that this is a nothing burger, particularly for liquid stocks like GOOG which average 1.6 billion shares a day.

Delta neutral hedging by market makers and/or market participants would have no relevance here. ITM options that are expiring have to be resolved (exercise and assignment).

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.