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I sold a covered call for 720 and on the last day it went up to 721 but closed the day at 719.70. After hours also it hovered over 720 but settled back below 720. I understand it could get assigned and it did. But I am trying to understand why would someone exercise the option when they could have bought the stock at slightly lower price in the open market?

It is almost like Why do people exercise call options at a loss? except that person had the stock close slightly above the strike price which still profits the buyer. But in my case I am failing to see how the buyer could have profited.

Siva
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1 Answers1

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Automatic exercise is based on price at market close, if ITM by as little as .01 the long option will exercise.

If a long option is OTM at close but after hours becomes ITM the holder can request the option be exercised (see broker documentation for deadlines on these requests).

In your case at least one person holding the 720c requested it be exercised after hours despite expiring OTM.

With NFLX, I see it as high as 720.52 shortly after close, so at that point it made sense to exercise if they wanted 100 shares. Perhaps they thought that after hours bump would continue, or wanted exposure over the weekend in case it gaps up in the AM on Monday. They could have bought the 720c for a dollar late in the day, shorted 100 shares at 720.52 after hours and exercised to cover, netting them $51 less commission/fees per contract. Can't know the motivation/plan, but clearly it was exercised because it went ITM after hours.

Hart CO
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