Let's say you have two different short put option positions at different strikes that come into the money against a short position on the expiration day, if stock closes below 100;
1000 Short Stock from 140 1000 Short Put at strike 100 500 Short Put at strike 120
So as the short puts will come into the money, the result will be long stocks of 1500 which will buy back 1000 short stocks. Which short put position would cover the short position; 1000 short puts or 500 short puts or average price of the two???
So, after the assignment, what will be the average price of the 500 long position?
(so the question is which short lot has priority over the other, the higher deeper in the money strikes or lower speculative strikes or neither of them)
Anyone ever had this?
The opposite is also true if the stock closes over 140;
1000 Long Stock from 100 1000 Short Call at strike 120 500 Short Call at strike 140
What would be the average price of the 500 short stock after the assignment?
We've been very concerned about the current market since Thanksgiving, due to some reliable sentiment measures (See our comments and charts here ).
Things are actually getting worse. Breadth has been poor if not on an outright sell for some time now. One of our favorite measures of breadth is Carl Swenlin's ITBM. Take a peek. Despite the bounce we had earlier, this indicator didn't budge.
Now, with the current weakness (as of Thursday noon), we are at risk of turning the weekly MACD negative, which would imply 2 weeks or so of further weakness.
Pay attention to these two indicators. The "powers-that-be" can certainly save this market and reverse it before the weekly turns down. If they don't, it bodes ill, however.
On the flip side, a few more down days might set up a nice rally and should the ITBM turn up from low enough, it's a signal no investor will likely want to miss.
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