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Let's assume the following scenario:

  1. American style long call option contract heavily in the money (CBOE)
  2. Couple of days to expiration
  3. Very high risk that underlying asset will fall sharply when regular trading session opens
  4. 1AM EST

Now, we cannot sell the option contract premarket, but could we exercise the option contract, get shares and sell them as soon as premarket trading sesion opens?

Three more points:

  1. Lost intrinsic value is clear to me in this potential transaction
  2. There is enough funds for the exercise
  3. Broker is Interactive Brokers

I found two bits of information about OCC rules:

  1. "From 9:15 EST" - so we can exercise "only" 15 minutes before regular trading session?
  2. "Exercise at ANY time"

They are sort of mutually exclusive.

So, to summarize this: Is it possible to take advantage of the exercise operation in order to get a chance to sell an asset in the premarket session (specific scenario being CBOE options, NASDAQ underlying shares & IB as broker)?

  • I don't know if you can sell short with IB but if you can you can sell the underlying short at open using the option as the cover / margin requirement which has the same effect. Then it doesn't really matter when you exercise the option. – MD-Tech Nov 11 '16 at 10:07
  • It appears that you can sell short with IB – MD-Tech Nov 11 '16 at 10:09
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American style CBOE long call option contract heavily in the money (with) Very high risk that underlying asset will fall sharply when regular trading session opens 1AM EST

Option trading opens at 9:30 AM EST so I'm not sure how this applies.

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A deep ITM call will have a high delta and it is a surrogate for the underlying. If the delta is near 100, the call's premium will pretty much match the price change in the underlying, dollar for dollar. If your high risk underlying is going to fall, you're going to lose. It doesn't matter whether you exercise your call or not.

If you exercise, there is no lost intrinsic value because you are buying the stock at a price lower by the amount of the intrinsic value. For example, XYZ is $50 and you hold a soon to expire $40 call that has a B/A of $9.75 x $10.25. The intrinsic value is $10. You are giving that up but you are buying a $50 stock for $40, a discount of $10. That's a wash. Regardless of what the underlying's price is when you exercise, you are paying $40 plus the original premium paid for the call.

Your problem is what and when you can sell the underlying and that has nothing to do with exercising the long call. So there is no possible way to take advantage by exercising operation (other than avoiding a haircut if the bid is less than intrinsic value and you are attempting to STC the call).

The only thing that you can do to prevent further loss is to short the shares as soon as the pre-market opens, locking in your gain (or cutting losses). You then exercise the call and at the end of the day it will be processed by the OCC and both positions will be gone from your account tomorrow.

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