The Fungible Option

Hi Mark,

I have a quick question. Let say I sold a put. If the put owner
has sold to close, does it mean my position will never get assigned?

How do I know whether the put owner has or has not sold to close?



John, this is a good question.  It's one of those things that's impossible to know until you read about it somewhere or ask the question.

1) No.  You can still be assigned an exercise notice

2) You don't have to know

Someone owns that contract and has the right to exercise. You don't have to know who owns that put option.  As long as someone owns it, it may be exercised. 

The only way you can be certain that you are never assigned occurs after you 'buy to close.'

But there's more.  Once you sell your contract – you are 100% separated from the buyer.  Each (for example) SPY Mar 90) put is identical to every other SPY Mar 90 Put.  That means the options are fungible, or interchangeable.

If one, or any other quantity, of those puts is exercised, the the Options Clearing Corporation (OCC) takes over the process. They verify that the person who tells his/her broker to exercise the option actually owns the option and has the right to exercise. 

Next they have a computerized list of every broker and cleaning member who has any customer with a short position in that option.  The OCC employs a random process that chooses one of those brokers and assigns the exercise notice to the broker.

Each broker has a method (that method must be a random selection process or 'first in; first out'.  The latter means the person who has been short the longest is chosen) by which it finds all the customers who have a short position (sold and not yet repurchased or assigned) in that option.  The broker then uses its method – usually random selection – to choose one account.  The broker then assigns the exercise notice to that account.

There's is a bunch of random selection involved in the process.  But the bottom line for you is that it doesn't matter who holds your specific option.  There is always a chance that you will be assigned an exercise notice when anyone, who owns one or more of that specific option, chooses to exercise.

There is no escape.  The option is a legal contract, and as long as you do not cancel your obligation (by buying to close), that contract is in effect until it is assigned or expires worthless.


Today is George Washington's birthday.  Although no longer a national holiday (it's combined with Abraham Lincoln's birthday (Feb 12) into President's day), it's a good day to celebrate by latching on to this unsolicited testimonial from Ken, and getting a copy of my book:

"I want to thank you so very much for writing your wonderful introduction to
options. It's by far the best source of useful information at my level that I have read. It explicitly addresses so many
questions that other, more technical works take for granted."


12 Responses to The Fungible Option

  1. John 02/22/2010 at 8:17 AM #

    Hi Mark,
    Thanks for the insightful post. If possible, may I request that you share some insights about the effect of after hours trading on option, as well as what to look for or caution if an option seller decides to hold until expiration (ie. what risks does after hours trading give to options held until expiration)?
    Many thanks,

  2. Mark Wolfinger 02/22/2010 at 8:56 AM #

    The reply here is shorter.
    1) Options do not trade after hours (AH), so AH trading has zero effect on options.
    However, the stock price may gap the following morning – based on after hours trading – and the new stock price plays a big role in determining the option prices that morning.
    2) The official closing price of the stock determines whether an option will be exercised automatically. AH trading is not considered.
    Thus, if you owned a Feb 60 call and thes tock closed at $60.02 your call will be exercised – unless you notify the broker: DO NOT EXERCISE.
    In AH trading, that stock may decline to 58. It does not matter. The call is still exercised for everyone who (foolishly) did not sell the call and/or did not notify the broker DO NOT EXERCISE.
    3) Thus,the risk of holding to the end – in addition to losing all time value in a long option position – is that you may wind up exercising an option – when you had no desire to do so.
    4) It’s the same for an option seller. You may believe that – in the example above – that the Feb 60 put safely expired worthless, only to discover that come Monday, you own stock and paid $60 per share.
    Not covering an option sold earlier always involves AH risk.

  3. Sean 02/22/2010 at 10:15 AM #

    Hi Mark,
    In deciding the short strike prices for an iron condor, standard deviation was usually used.
    One quick way to calculate the standard deviation is to use the following formula:
    1 Standard Deviation =
    Security’s price * Volatility * (Square root of (days to expire/365))
    My question is how to decide the volatility?
    I know from the Options Industry Council web side we can get the Implied Volatility.
    But, should we use the IV for Put or Call?

  4. Tim Couch 02/22/2010 at 11:34 AM #

    Hi Mark,
    I use Excel with the MSN Stock Quotes add-in to track stock and option prices. Since the option names changed in January I can’t get option prices anymore and the add-in from Microsoft has not been updated since 2004 so I may be out of luck.
    Can you recommend an alternative?
    Thank you,
    Tim Couch

  5. Mark Wolfinger 02/22/2010 at 11:39 AM #

    a) I prefer to use SQRT (252) because there are that many trading days in one year. But I am not adamant, and you can use 365 if you prefer.
    b) If you open the trade without a market bias, then I’d use IV for the ATM options. That gives you a number with no volatility skew. I believe it represents the best (at the moment in time that you are making the iron condor trade) estimate for future volatility of the underlying. This assumes no special situations are in effect – such as earning to be released tomorrow.
    c) Standard deviation is one method for choosing strikes. There’s nothing wrong with that, but thee are alternatives. Choose one that suits you and your comfort zone.
    Another is to choose delta. A third is to decide how much premium you must collect.

  6. Mark Wolfinger 02/22/2010 at 11:44 AM #

    No I cannot.
    How about some help from readers. Can anyone help Tim?
    I also made the request via Twitter

  7. Rob 02/22/2010 at 2:44 PM #

    If you are a client of TOS or TDA you can use Dynamic Data Exchange (DDE) to pull live data into Excel from the TOS trading platform. I do it and it works like a champ.
    Regards, Rob

  8. Frank 02/22/2010 at 3:27 PM #

    Possibly Hoadley has updated his software to reflect the option naming changes. I’m pretty sure it’s able to pull option information from free sources, although the program is not free and has a clunky interface (at least to those of us with little or no experience with Excel plugins).

  9. Frank 02/22/2010 at 3:36 PM #

    Mark, do you know what the formula is to calculate a 0.5 standard deviation? I see it’s called for but the calculaton is not given in one or two of the CBOE videos vids on butterflies, I think.
    Thanks for the blog. It’s a great source for all of us.

  10. Mark Wolfinger 02/22/2010 at 3:59 PM #

    I don’t know and have been unable to find it via Google.
    I believe (a guess) that it’s the size move in the underlying for which the probability of moving more than that amount (or less) is 50%.

  11. Andy 02/23/2010 at 3:00 AM #

    Was wondering if you would be able to comment on maintaining a ‘delta neutral’ portfolio. Particularly, when dealing with condors, delta can become unbalanced as price approaches one of the wings… is rolling the OTM spread closer to the money a legitimate strategy?
    Another method I’ve seen is to simply balance your position with calls and puts. For example, I am bullish on AAPL and buy 5 calls; but to neutralize delta, I also buy 2 puts. Is this position more advantageous than simply buying 3 calls and no puts?

  12. Mark Wolfinger 02/23/2010 at 8:30 AM #

    Good question and worthy of a blog post to discuss.
    Please give me a few days to get to it.