short selling American option?

If you shorted American option, would it be like you suddenly have to sell (call) or buy (put) it when the buyer exercised its right?

But there are thousands of buyers and sellers in the option market. So I wouldn't have any idea who is the buyer of my option even if I short sold it, would I?

The only option in my country, Japan, which has substantial volume is Nikkei 225 Index option. And it's European option. We can hold the short position until the expiration date. So I don't know what it's like to short American option.

Please tel me what it's like to short American options.

Update:

Leo Enoch. Suppose there is option of AA stock. I shorted it its put $50 (strike price) at $1. If the buyer of my short position bought it at $0.10, it's likely that he exercise it when the stock is at $49.50 because it could make $0.40 profit.

On the other hand, if the buyer bought it at $1, it's unlikely that he exercise it when the AA stock is at $49.50 because it would make $0.50 loss.

So knowing the buyer enables me to anticipate when it could be exercised.

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  • 1 decade ago
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    <<<If you shorted American option, would it be like you suddenly have to sell (call) or buy (put) it when the buyer exercised its right?>>>

    For a call option there is only once circumstance where it is the holder's financial best interest to exercise the option early, just before the ex-date for a substancial dividend particularly when the extrinsic value of the option is less than dividend amount. That does not mean that is the only time a call option will be exercised early, but it is quite unlikely at any other time.

    For a put option the situation is somewhat different because of the carrying cost associated with put options. To hedge a long put option with stock, you have to buy shares of the stock. That means the owner of a hedged put option will own both the put option and shares of the stock. The money he has invested in the option and stock is not earning interest, so the interest he is losing is called his carrying cost. With a European-style option the cost of the option can drop below its intrinsic value since it cannot be exercised early. With an American-style option the cost cannot drop below its intrinsic value since it could be exercised immediately for a risk-free profit if it did.

    If the bid quote for an American-style put option is less than the intrinsic value of the option, there is a substantial risk that anyone short that option will be assigned early. If the bid quote for an American-style put option is more than the intrinsic value of the option, there is almost not chance of an early assignment.

    <<<But there are thousands of buyers and sellers in the option market. So I wouldn't have any idea who is the buyer of my option even if I short sold it, would I?>>>

    The buyer is the Option Clearinghouse Corporation (OCC) any time you sell an option. Similarly, the seller is the OCC any time you buy an option.

    Say you sold 5 contracts of a particular option, your friend Harry bought 5 contracts of the same option on the same day, and the total volume for the day was 5 contracts. That means the volume represents the 5 contracts you sold and Harry bought, but it does not mean Harry bought the contracts from you. There is no link between you and Harry as far as the OCC is concerned. The next day, if Harry exercised the options, the OCC would randomly pick someone who is short 5 contracts and send them an assignment notice. It might be you, but it is more likely to be someone else.

    I hope that answers your follow-up question to Leo Enoch.

    <<<Please tel me what it's like to short American options.>>>

    Trading American-style options is not that different than trading Europtean-style. It is true you always have to be prepared for an early assignment when you are short, but it is not that common. If you understand why someone might exercise early, you know how much risk there is.

    Source(s): Options books I have read, discussions with options professionals, experience.
  • Anonymous
    1 decade ago

    That depends which american options you shorted, you shorted the call options, when the buyer exercise it, you must sell the underlying asset to the buyer at the strike price.

    If you shorted the put option, meaning when the buyer exercise it, you are obligated to buy the underlying asset or the stocks at the strike price where you sell the put options.

    Yes you would not have any idea who buy your options and you don't have to know? Why would you want to know for anyway?

    Well if you short the american options, you can still hold it to expiration provided it is out of the money during the expiration. If it is in the money the exchange will exercise the options automatically and you are to meet any obligation arises from that exercise.

    Hope this help you understand better about options

  • Andy
    Lv 4
    1 decade ago

    What it really depends on is how much premium is left in an option. Also when the buyer exercises his options the person who gets assigned is totally random and this is controlled by the OCC (Options Clearing Corp).

    In your example you're short the Feb 50$ Put and AA is 49.50 -

    If the put is trading for .60 cents there is very little premium between the stock price and the option, so your chances of getting assigned are much higher then if the put was trading for 1.00.

  • 1 decade ago

    The difference between American style and European style options are that American style can be exercized any time before expiration, whereas European can only be exercized upon expiration. So, yes you may have to sell the stock if you shorted the call, or buy the stock if you short the put, but the assignment process is completely random. You may have 10 contracts shorted and only be assigned on 1 of them.

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  • 1 decade ago

    all over the world exchanges are practicing uniform methods whether it is Japan or EU or UK or USA or other Asian Countries - there may be very minor variation.

    What you are doing in Japan (Nikkei 225 Index option) and what you have explained in your question is the same practice in American Option.

    If you read history mother of all trading practices are from UK (London) and this has been given good shape in America with fair trade practices and transparency and the methods spread all over the world.

    the subject which you have dealt with is trading in derivatives instruments - options - go short/long with put and call options which are all called arbitrage - one is complementary (support) to other options when exercised. one should not play without support to cover (minimize loss) as the market is very risky - a stop loss is required.

    Briefly when you deal with futures (in derivative Instruments) - it is very clear that you can hold short position until the expiration date (see your statement you have the answer)

    Source(s): an investor since 40 years, economist, Professional in Materials Management, Market survey, etc.,
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