Trading at a Discount
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.
