Friday, March 14, 2014

I received an assignment notice for Nikkei 225 Option

Today I received an assignment notice from my broker that my short option contract on Nikkei 225 (N225) which expired yesterday, 13-Mar-2014.

Was I surprised?  Yes and No.

Yes because N225 is a cash settlement option.  So, I should not be 'assigned' to buy the Nikkei Index component stocks.  After I clarified with the broker, I need not take any action.

No because while N225 close at 14,815.98 on 13-Mar-2014 Japan time, which is about 300+ points above my Strike of 14,500,

N225 Daily as at 13-Mar-2014
N225 Daily

SPX Daily as at 13-Mar-2014
SPX Daily
SPX close 21.86 point down on 13-Mar-2014 US time.  So, N225 should 'crash' more than 300+ points when N225 open for trading on 14-Mar-2014 Japan time.  There is a high chance that it will hit my Strike.

For most Index options, the settlement price is the opening price on the business day following the last trading day.  N225 final settlement price is 14,429.87 (Special Quotations) on 14-Mar-2014.  70.13 points below by Strike of 14,500.  I suffered a loss of JPY 70,130 or USD 689.10 for this contract.

On the expiration day, 13-Mar-2014, I can close this N225 Mar13'14 14500/14250 Put Spread for a profit of JPY 8,600 (~USD 83.94) with a 8 Days on Trade, 11% Return on Margin (ROM).  With the full Iron Condor (including 15750/16000 Call Spread), it will be JPY 36,200 (~USD 353.34), 48% Return on Margin with a 8 Days on Trade.

I didn't.  Because it was the expiration day.  Because delta is only -0.0548.  These are good reasons to stay in the trade.

But not good enough when N225 is just 300+ away from my Short Strike.  A down day for N225 could be easily 300-500 points.

Worst still, when we are talking about a spread of 4 points, JPY 4,200 (~USD 41.27) reward that we are taking the risk.

Mark Wolfinger of "The Rookie's Guide to Options" advice not to risk another day (even on the expiration day) for a penny even when your Strike is quite far away.  You don't know what will happen tomorrow.  Michael Benlifa in his book "Profiting with Iron Condor Options" also advice to take profit when it reach your targeted ROM.

A good lesson learned.  A good experience of being assigned.  A good understanding of it is the next day opening price that matters for Index Options.

No comments:

Post a Comment