Why does borrowability of shares inversely correlate with probability of assignment or exercise?

I transcribe 5:26 of this video. I don't know that YouTuber's credentials.

So looking back here, what could possibly cause you to get assigned early? If we look right here, AMD shares are listed as easy to borrow. That's really important to know, and it means that the risk of early assignment is almost non-existent.

If we put something like Tesla in, they're listed as hard to borrow and that slightly elevates your risk. If shares are harder to borrow, calls are more likely to get exercised, which puts you in a position where you could be hitting max loss early on account of early assignment like we just talked about. And there's some smaller OTC stocks things like this [the YouTuber is pointing to ticker symbol TSOI] that are less not available to borrow. These, pretty much the second that they're in the money, are going to be exercised so that's the risk that you earn right there.

2 Answers

On a conceptual level, I guess he means that, referring to American call options, for hard-to-borrow stocks (thus with high borrow cost), the yield you can generate from lending the stock has higher value than the continuation value from sticking with the option, so it’s worth it to exercise now and immediately lend it out.

I disagree with the author's premise. The primary reason that options are exercised early is because of discount arbitrage (an ITM option trades below its intrinsic value) or there is a dividend arbitrage in an ITM put (the time premium is less than the dividend, NOT the call).

No one with a lick of sense would exercise an option that has time premium remaining because that would be throwing away the time premium and incurring more transactional costs (B/A spread and commissions if you're still paying them).

In the above scenarios, early exercise occurs because of the P&L not because the stock is hard to borrow.

I listened to another minute of the video and I think that the author really has no clue. He talks about the possibility of an OTM short options being assigned early because of a dividend. Now who wouldn't want that to happen to them? If the stock is \$102 and I'm short the \$105 call, please, make me sell it to you for \$105! It makes no sense at all. He continues his errors with another example. A stock is \$101 and you are short a \$100 call that's \$2. The company announces a \$2 dividend and the call owner exercises and you are assigned. Why in the world would he do that? He could sell the call for \$2 and buy the stock for \$101. Exercising throws a dollar of time premium away. • @NNOX Apps - Thank you for editing my question and fixing that font/formatting problem. I've been trying to figure out how to correct that problem for a few days, whenever I posted an answer using$ signs :->) – Bob Baerker Oct 2 '20 at 11:13