What happens to the 100 shares if someone "sell to close" their call option position?

Question

Allow me to explain.

Let's say I sell 1 covered call and receive the premium. When I sell a call, I am assuming that someone on the other end would have bought my call (say Nora).

If the share price goes above my covered call's strike price. Nora can take two courses of action:

• Exercise the option
• Sell to close - Nora can sell a call contract to close her position.

In the first case, it is understandable that Nora bought my shares at the strike price and she will own the shares.

But what if Nora sells to close, what happens to my shares? Who owns them now?

Answer 1

If Nora sells a call, she closes her position but the person who bought the call now has an option on your shares. Until that person exercises the call you still own the shares. If the stock price is above the strike price you should expect that the option will be exercised by someone. When it is exercised you will be forced to sell the shares and will receive the strike price for them.

Answer 2

Unless illiquid, prior to expiration an option contract will be bought and sold many times over. So while your short call contract is open, your counterparty will always be changing and your initial link to "Nora" will cease to exist.

The only possibilities that match your proposed scenario would be if:

• "Nora" was your counterparty in the initial transaction, Open Interest remained at one through the life of the contract, and when she exercised her long contract, you were assigned

• Open Interest is greater than one and when "Nora" exercised her contract, you were randomly assigned by the OCC

Both of these scenarios are highly improbable.

The short answer? Someone exercises their long call. In the evening, the OCC runs its "Wheel" which randomly selects assignees. If your name comes up then your shares are gone the next morning.