An option that is trading below its intrinsic value is trading at a discount. For instance, a $50 a call option that is bid at $2.90 is trading at a discount when the stock is at $53. This condition often exists during the week of expiration. When options trade at a discount, assignment risk increases. The holder of the call option in this case is better off selling shares of stock at $53 and exercising his options. The proceeds from this transaction are three dollars as opposed to the $2.90 he can get in the open market for the option. If you are short a stock option that is trading at a discount and you want to avoid assignment, you should consider buying it back and selling an option that has time premium. A few days before option expiration, Market Makers bid for options below because there is an arbitrage opportunity for them. Don’t sell your options at a discount. If you are long put options that are trading at a discount, buy the stock and exercise your put. You will exit the trade at parity and no additional margin requirement is incurred if you do it on the same day.
Trading at a Discount
December 10, 20081 min read