Options Trading Tutorial

What happens if I sell a call and the strike price is AT the money?

Hi! What happens if I sell a call and the strike price is AT the money? Will it be called away or will it expire worthless? Thank you!

Public Comments

1. Depends on the direction of the stock price goes prior to the expiration date.. The buyer probably won't exercise the option until they can at least break even. So hypothetically speaking, you sell a call option for $5 and the strike price is $50, and the stock is trading at $50, the buyer likely won't exercise the option until the stock reaches $55, so they are at least even. But they have the right to exercise it immediately if they want to.
2. It depends on the volatility of the premium, time left to expiration and underlying stock 's volatility.
3. Black-Scholes and volatility will determine the value.
4. First, there is no good financial incentive for the holder of a call option to exercise it prior to expiration unless there is a ex-date for a significant dividend, and even then it would normally only be exercised if the dividend exceeded the extrinisic value (time premium) of the option. So, it is very unlikely that you will be assigned before expiration. At expiration, unless the option is in the money by at least $0.05 per share it will only be exercised if the holder expicitly makes a request to exercise it. It is totally up to the holder if the stock is at the money, and there is no good way for the writer to predict if he will be assigned or not. If you do not want to be assigned, simply close the option with a "buy to close" transaction. My only experiences with being short ATM options at expiraion have been with put options. In every case I have received a partial assignment. For example, if I was short 10 contracts I might have been assigned six contracts and had the other four expire worthless. Just to make sure I am clear, it is always possible that you will be assigned a short call option at some time prior to expiration, but it is very unusual. ----------------- I want to clear up one thing from financegal27's answer. The premium you received when you sold the contract has absolutely nothing to do with the chances that you will be assigned. When an option holder exercises an option, the assignment is randomly sent to a brokerage that has at least one customer who has written the option, and the brokerage then decides which customer receives the assignment. The fact that you received a $5.00 premium when you sold the option does not mean that you can only receive an assignment from someone who paid a $5.00 premium. The holder who exercised the option may have paid $0.05 or $10.00 for it and you might still be the one assigned.