Daily Market Update – May 5, 2014 (Close)

I like getting the week off to a start with cash in reserve, especially when the market looks as if it may be opening up on the weak side.

What I don’t like is one of those subtle areas of discrimination that don’t allow for a level playing field.

I’m not referring to this LA Clipper and Donald Sterling story, but instead to the discrimination that allows an option contract holder the opportunity until after the market closes to elect not to participate in automatic assignment.

In this case it was JP Morgan, which closed at $55.58 and was destined for assignment at $55.50. At least that’s what any normal person would have expected to be the case.

That is until it announced some adverse news regarding forward revenues and risk in Russia.

While normally shares closing a penny or more above the strike price are automatically assigned, that’s really not accurate. Contract holders have the right to tell their brokerages not to assign shares on their behalf. The automatic assignment is referred to as “exercise by exception.” They can request an exception to that exception.

Sometimes they make that decision because they just don’t have the money to pay for the shares. Other times they just think that there’s something better they can do with their money and leverage it, to boot.

The cynic in me believes that some knew of what kind of news was to come.

When JP Morgan shares then dropped after hours to about $55 at first I felt relieved, but then I realized it’s not a fair world.

What’s galling is that brokerages have a different time cut-off for option contract holders to make that automatic assignment decision. The cut-off is after the closing bell, so that they can react to news that you can’t.

This was the second time that’s happened to me.

Once it resulted in shares being assigned that I expected to still be with me on Monday and this time it resulted in shares going unassigned.

The first time resulted in missing out on nice after hour gains and this time taking on the losses that I expected someone else would carry as a burden.

At some point I’ll get over it, especially if I can put the cash from those that were rightfully assigned to good use.

With cash up to 35%, which is down a couple of percentage points after finding JP Morgan still in my account, I’m willing to get down to about 20% this week.

Again, with a fair number of positions set to expire this week, I may instead look at next week, which happens to be the end of the May 2014 cycle for my new expirations.

In the meantime,as the market has opened with a triple digit loss, it’s not necessarily a time to just immediately jump in, even with the cash in hand. Barely a couple of hours later, though, and with no reason to have expected as such, that entire loss was reversed.

I had plan on sitting and watching a bit, listening for news and looking for any signs of stability. The news never came, but the stability did as this was one of the busiest trading Mondays I’ve had for a while It almost seemed like the old days.

Still, I was bothered by JP Morgan and for a while I believed that it might end up becoming the first trade of the day but its premium didn’t really reflect much in the way of risk that usually comes with any kind of large, especially unexpected movement in price. 

Making that purchase would have made me happy if the shares were replacement for the assigned ones, but I suppose I could get some satisfaction by simply booking a profit on the new shares and getting an opportunity to sell options on the old and unwanted ones. But that happiness, too, was taken away from me.

It’s beginning to sound like something out of a soap opera.

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

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