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Aquar.i asked in Business & FinanceInvesting · 1 month ago

When you sell call and put stock options for premiums and close out early how does the buyer get their shares ?

I thought when you sell an option contract you have to stay in it like any other contract. So when you sell an option and close out early before assignment who does the buyer use for assignment when the price does go past the strike price or expiration date? Who does the call buyer use then to buy their shares from and who do put buyers use to  to sell their shares to? If the seller who sold them the contract buys to close early and is gone and out of the contract

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  • 1 month ago
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    The only thing that matters is that the number of contracts on each side of an option is equal. This will always be true because there is a buyer and a seller in each transaction. 

    For an example assume a new option is listed. The first transaction is for 20 contracts. Abe buys 20 contracts and Betty sells 20 contracts. Open interest (the number of contracts that exist) is now 20. The next transaction is for 30 contracts. Cindi buys 30 contracts and Dave sells 30 contracts. Open interest is now 50. The third transaction is for 5 contracts. Dave buys 5 contracts and Elaine sells 5 contracts. Open interest is unchanged at 50. If Abe and Cindi exercise all their options Betty would fill 20 contracts, Dave would fill 25 contracts and Elaine would fill 5 contracts.

    Open interest will not change if one party in the trade is closing a position and the other party is opening a position.  If both parties are opening position open interest increases. If both parties are closing positions open interest decreases. If an option is exercised open interest decreases.

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    In reality there is one organization that is a party in every stock option trade on any American exchange: the Option Clearing Corporation (OCC). Every time option contracts are traded a small fee is paid to the OCC which manages the contracts. If an option is exercised the exercise notice is sent to OCC which randomly determines which brokerage(s) will receive the assignment notice. The brokerage(s) will then determine which account(s) receives assignment notices using a predetermined scheme which has been approved by the OCC. 

    In other words, there is never a contract between two traders. There are only contracts between one trader and the OCC.

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