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Does exercising an option move the price?

Personal Finance & Money Asked on September 4, 2021

This is a follow up question to this one.

Summary: There are deep in-the-money puts at strikes of $800 being traded for an instrument whose price is much below that (in the ballpark of $225 at the time, now at $53).

The put’s open interest decreased over time. As I understand it, this can only mean that the contract either expired or was exercised.

Since it expires today, I know for sure it hasn’t expired yet. So some of the open interest must have been exercised, which means somebody sold short for $800, which means somebody else bought the underlying at $800, fulfilling the option contract.

My question is: why is this trade not reflected in the underlying’s price history? There should be a spike (or various spikes) of $800 where these contracts were exercised.

3 Answers

Open interest declines for three reasons:

  • Option expiration

  • Option exercise

  • A pair of closing option transaction (one counterparty buys to close and the other sells to close and the contract ceases to exist).

Since it expires today, I know for sure it hasn't expired yet. So some of the open interest must have been exercised, which means somebody sold short for $800, which means somebody else bought the underlying at $800, fulfilling the option contract.

My question is: why is this trade not reflected in the underlying's price history? There should be a spike (or various spikes) of $800 where these contracts were exercised.

There are no $800 transactions on the stock exchange when options are exercised. Satisfaction of the option contract is between two counterparties and is at $800. The shares are delivered from A to B or from B to A depending on whether it was a put or a call exercise.

Suppose A is short the $800 put and it's owned by B who exercises the contract. If B owns 100 shares, he sells them to A for $800 (an off exchange transaction).

If B does not own the shares, he can go short if shares are borrowable from C which he then delivers to A. If shares are not borrowable or B wants to close via this exercise, he buys 100 shares on the market (an exchange transaction at GME's current price of $225).

Secondarily, note than if option exercise results in one of the counterparties going to the exchange to buy or sell shares to satisfy the assignment or exercise, that contributes to moving the underlying's price since it's a stock exchange trade. However, this stock volume is small in size since put and call induced stock trades offset each other to some degree and it's miniscule compared to GME trading 50 to 200 million shares a day.

Correct answer by Bob Baerker on September 4, 2021

With no ticker cited, I'd suggest -

  • The option wasn't exercised, it was sold. i.e. the option seller bought it back.
  • The volume caused by option execution didn't create enough volume to move the market.In general, the open interest goes down as expiration approaches, for multiple reasons, so the final Friday executions are low compared to the natural volume. If not, yes, it can move the price of the stock.

Answered by JTP - Apologise to Monica on September 4, 2021

There should be a spike (or various spikes) of $800 where these contracts were exercised.

No there shouldn't. Option exercises do not go through the exchange's open outcry (bid/ask) process and so do not show up on the trade price history. They are direct exchanges, probably through a clearing house, but I am unfamiliar with these specifics (I don't think the specifics are relevant to your question, though).

I do not know if they show up in the volume, but I doubt it for the same reason.

The put's open interest decreased over time. As I understand it, this can only mean that the contract either expired or was exercised.

No - it can also mean that open option positions were closed by selling the options (or buying to close a short option position). If two traders close open positions in the same transaction, then open interest is decreased. If one is opening and one is closing, OI is unaffected. If both are opening, then OI increases.

Answered by D Stanley on September 4, 2021

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