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Understanding assignment risk in Level 3 and 4 options strategies

E*TRADE from Morgan Stanley

With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned , either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a short position can be assigned to you at any time. On this page, we’ll run through the results and possible responses for various scenarios where a trader may be left with a short position following an assignment.

Before we look at specifics, here’s an important note about risk related to out-of-the-money options: Normally, you would not receive an assignment on an option that expires out of the money. However, even if a short position appears to be out of the money, it might still be assigned to you if the stock were to move against you just prior to expiration or in extended aftermarket or weekend trading hours. The only way to eliminate this risk is to buy-to-close the short option.

  • Short (naked) calls

Credit call spreads

Credit put spreads, debit call spreads, debit put spreads.

  • When all legs are in-the-money or all are out-of-the-money at expiration

Another important note : In any case where you close out an options position, the standard contract fee (commission) will be charged unless the trade qualifies for the E*TRADE Dime Buyback Program . There is no contract fee or commission when an option is assigned to you.

Short (naked) call

If you experience an early assignment.

An early assignment is most likely to happen if the call option is deep in the money and the stock’s ex-dividend date is close to the option expiration date.

If your account does not hold the shares needed to cover the obligation, an early assignment would create a short stock position in your account. This may incur borrowing fees and make you responsible for any dividend payments.

Also note that if you hold a short call on a stock that has a dividend payment coming in the near future, you may be responsible for paying the dividend even if you close the position before it expires.

An early assignment generally happens when the put option is deep in the money and the underlying stock does not have an ex-dividend date between the current time and the expiration of the option.

Short call + long call

(The same principles apply to both two-leg and four-leg strategies)

This would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short and simultaneously sell the long leg of the spread.

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date, because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

Short put + long put

Early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

However, the long put still functions to cover the position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.

Here's a call example

  • Let’s say that you’re short a 100 call and long a 110 call on XYZ stock; both legs are in-the-money.
  • You receive an assignment notification on your short 100 call, meaning you sell 100 shares of XYZ stock at 100. Now, you have $10,000 in short stock proceeds, your account is short 100 shares of stock, and you still hold the long 110 call.
  • Exercise your long 110 call, which would cover the short stock position in your account.
  • Or, buy 100 shares of XYZ stock (to cover your short stock position) and sell to close the long 110 call.

Here's a put example:

  • Let’s say that you’re short a 105 put and long a 95 put on XYZ stock; the short leg is in-the-money.
  • You receive an assignment notification on your short 105 put, meaning you buy 100 shares of XYZ stock at 105. Now, your account has been debited $10,500 for the stock purchase, you hold 100 shares of stock, and you still hold the long 95 put.
  • The debit in your account may be subject to margin charges or even a Fed call, but your risk profile has not changed.
  • You can sell to close 100 shares of stock and sell to close the long 95 put.

Long call + short call

Debit spreads have the same early assignment risk as credit spreads only if the short leg is in-the-money.

An early assignment would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short share position and simultaneously sell the remaining long leg of the spread.

Long put + short put

An early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

All spreads that have a short leg

(when all legs are in-the-money or all are out-of-the-money)

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

However, the long put still functions to cover the long stock position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously. 

What to read next...

How to buy call options, how to buy put options, potentially protect a stock position against a market drop, looking to expand your financial knowledge.

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How dividends can increase options assignment risk

assignment risk options

Most experienced investors are familiar with the adage that "if an investment opportunity sound too good to be true, it probably is." While this sentiment may often be associated with overly optimistic assumptions, it also applies to investors who sell options contracts without first considering the ex-dividend date for a stock or ETF.

How dividends work

A quick review of how dividends work: A dividend represents a payment of a company's revenues to shareholders, most often in the form of cash. Cash dividends are paid out on a per-share basis. For example, if you own 100 shares of a stock that pays a $0.50 quarterly dividend, you will receive $50.

Not all companies pay dividends, but if you're investing in options contracts for companies that do pay them, you need to keep several important dates in mind:

  • Declaration date: Date on which a company announces the per-share amount of its next dividend.
  • Record date: The cut-off date established by the company to determine which shareholders of its stock are eligible to receive a distribution. This is usually, but not always, 1 day after the ex-dividend date.
  • Ex-Dividend date: Date on which a stock's price adjusts downward to reflect its next dividend payment. For example, if a stock pays a $0.50 dividend, the stock price will drop by a half point prior to trading on the ex-dividend date. If you buy a stock on or after the ex-dividend date, you are not entitled to the next dividend.
  • Dividend (payment) date: Date shareholders receive cash in their account from a dividend.

See Locating dividend information for stocks for additional details.

Dividends offer an effective way to earn income from your equity investments. However, call option holders are not entitled to regular quarterly dividends, regardless of when they purchase their options. And, unlike stock or ETF prices, options contract prices are not adjusted downward on ex-dividend dates.

This can cause a problem for anyone who has sold an options contract without first considering the impact of dividends. Why? Because the risk of being assigned on an option contract is higher when the underlying security of an in-the-money option starts trading ex-dividend. To understand the risks and how dividends impact options contracts, let's explore some potential scenarios.

Avoiding or managing early assignment on covered calls

As noted above, the ex-dividend date is particularly important to anyone who writes a covered or uncovered call option. If a covered call option you have sold is in the money and the dividend exceeds the remaining time value of the option, there is a good chance an owner of those calls will exercise his options early.

If you are assigned, you must deliver your shares of the underlying security, as well as the dividend income, to the owner of the call. Let's examine a hypothetical example to illustrate how this works.

  • Bob owns 500 shares of ABC stock, which pays a quarterly $0.50 dividend.
  • The stock is trading around $25 a share on August 1 when Bob decides to sell 5 October 30 calls.
  • By early October, ABC stock has risen to $31 and, as a result, Bob's covered calls are in the money by $1. The calls will expire in 10 days and tomorrow the stock will start trading ex-dividend.
  • Because the remaining time value of the call option is less than the value of the dividends, the call owner will likely exercise his options on the day before the ex-dividend date.

See Locating option values in Active Trader Pro ® .

If Bob does not take any action to close his covered call position, there is a good chance he will be assigned on the ex-dividend date. This means he will no longer own 500 shares of the stock and he will not receive the dividend income.

To avoid this scenario, Bob has a couple of choices:

  • He could buy back the calls he sold to retain the stock and the dividend. However, he would have to do this prior to the ex-dividend date. If he waits until the ex-dividend date or later, he will not be entitled to the dividend income. Keep in mind that it's possible to get assigned prior to the day before the ex-dividend date, so this strategy is not foolproof.
  • The other option is to close out his short position and write a new covered call with a later expiration date or a higher strike price. This strategy is known as "rolling" your options contract forward.

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Avoiding or managing early assignment on calls not covered by shares

Now let's consider what could happen if Bob had sold uncovered calls on ABC stock:

  • As in the example above, ABC stock pays a quarterly $0.50 dividend and is trading around $25 a share
  • Bob has a negative view on the stock and decides to sell 5 uncovered October 30 calls
  • By early October, ABC stock has risen to $31 and, as a result, his uncovered calls are in the money by $1

To make matters worse, Bob learns that tomorrow the stock will start trading ex-dividend. Because the remaining time value of the options is less than the value of the dividends, owners of these calls will likely exercise their options 1 day prior to the ex-dividend date.

To limit his exposure, Bob has several choices. He can buy back his uncovered calls at a loss, buy the stock to capture the dividend, or sit tight and hope to not be assigned. If his calls are assigned, however, he will have to pay the $250 in dividend income, in addition to covering the cost of delivering 500 shares of ABC stock. If Bob had initiated an option spread (buying and selling an equal number of options of the same class on the same underlying security but with different strike prices or expiration dates), he could also consider exercising his long option position to capture the dividend.

Other considerations and risks

If you are implementing a spread strategy that includes long contracts and short contracts, you need to remain particularly vigilant in regard to assignment risk. If both contracts are in the money and you are assigned on the short contracts, you will not be notified until the following business day. While you can exercise your long position on the ex-dividend date to eliminate the short stock position that was created, you will still owe the dividend because you were short the stock prior to the ex-dividend date.

Ways to avoid the risk of early assignment

If you are selling options (covered or uncovered), there is always the risk of being assigned if your trade moves against you. This risk is higher if the underlying security involved pays a dividend. However, there are ways to reduce the likelihood of being assigned early. These include:

  • Do your homework: Know if the stock or ETF pays a dividend and when it will start trading ex-dividend
  • Avoid selling options on dividend-paying stocks or ETFs when your trade includes ex-dividend
  • Invest in European-style options: American-style options can be assigned at any time before the option expires, European-style options can only be exercised at expiration

See Locating dividend information for ETFs for details.

If you are a Fidelity customer and you have questions about your exposure to assignment risk, you can always contact a Fidelity representative for help.

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assignment risk options

By Tyler Corvin

assignment risk options

Ever been blindsided by an unexpected traffic ticket in the mail? 

You knew driving came with its set of potential consequences, yet you took to the road regardless. Suddenly, you’re left with a tangible obligation to pay. This unforeseen shift, where what was once a mere possibility becomes an immediate reality, captures the spirit of options assignment within the vast realm of options trading.

Diving into the details, option assignment serves as the bridge between the abstract realm of rights and the concrete world of duties in this field. It’s that unassuming piece in the machinery that can, without warning, change the entire game – often carrying notable financial repercussions. In a domain where every move has implications, truly grasping option assignment is foundational, ensuring not just survival but genuine success.

Join us in this comprehensive exploration of option assignment, arming traders of all experience levels with the knowledge to sail these intricate seas with assuredness and accuracy.

What you’ll learn

What is Options Assignment?

How options assignment works, identifying option assignment , examples of option assignment, managing and mitigating assignment risks, what option assignment means for individual traders.

  • Conclusion 

Dive into the realm of options trading and you’ll find a tapestry of processes and potential. “Options assignment” is one pivotal cog in this intricate machine. To a newcomer, this term might seem a tad daunting. But a step-by-step walk-through can demystify its core.

In its simplest form, options assignment means carrying out the rights specified in an option contract. Holding an option allows a trader the choice to buy or sell a particular asset, but there’s no compulsion. The moment they opt to use this right, that’s when options assignment kicks in.

Think of it this way: You’ve got a ticket (option) to a show (buy or sell an asset). You decide if and when to attend. When you make the move, that transition is the options assignment.

There are two main types of option assignments:

  • Call Option Assignment : Triggered when a call option holder exercises their right. The seller of the option then steps into the spotlight, bound to sell the asset at the agreed-upon price.
  • Put Option Assignment : Conversely, if a put option holder steps forward, the seller of the put takes the stage. Their role? To buy the asset at the specified rate.

To truly grasp options assignment, one must understand the dance between rights and obligations in options trading.

When a trader buys an option, they’re essentially reserving a right, a possible move. On the other hand, selling an option translates to accepting a duty if the option’s holder chooses to play their card.

Rights with Call Options: Buying a call option grants you a special privilege. You can procure the underlying asset at a set price before the option expires. If you choose to exercise this right, the one who sold you the call gets assigned. Their task? Handing over the asset at that set price.

Obligations with Put Options: Securing a put option empowers you to sell the underlying at a pre-decided rate. Should you exercise this, the put’s seller steps up, committed to buying the asset at the given rate.

Several factors steer the course of options assignment, including intrinsic value, looming expiration dates, and current market vibes. To stay ahead of these influences, many traders utilize option trade alerts for timely insights. And remember, while many options might find buyers, not all see execution. Hence, not every seller will get assigned. For traders, understanding this rhythm is vital, shaping many strategies in options trading. 

In the multifaceted world of options trading, discerning option assignment straddles the line between art and science. While no technique guarantees surefire results, several pointers and signals can wave a flag, hinting at an impending assignment.

In-the-Money Options : A robust sign of a looming assignment is the option’s stance relative to its strike price. “In-the-money” refers to an option’s moneyness , and plays a pivotal role in the behavior of option holders. Deeply in-the-money (ITM) options amplify the odds of assignment. An ITM call option, where the market price of the asset towers above the strike price, encourages the holder to exercise and swiftly offload the asset on the market. Conversely, an ITM put option, where the market price trails significantly behind the strike price, incentivizes the holder to scoop up the asset in the market and then exercise the option to vend it at the loftier strike price.

Expiration’s Shadow: The ticking clock of an expiring option raises the assignment stakes, especially if it remains ITM. Many traders make their move just before the eleventh hour to capitalize on their gains.

Dividend Dates in Focus: Call options inching toward expiry ahead of a dividend date, especially if they’re ITM, stand at an elevated assignment crosshair. Option aficionados might play their call options to pocket the dividend, which they’d bag if they possess the core shares.

Extrinsic Value’s Decline : A diminishing time or extrinsic value of an option elevates its exercise odds. When intrinsic value dominates an option’s worth, a holder might be inclined to cash in on this value.

Volume & Open Interest Dynamics : A sudden surge in trading or a dip in open interest can be telltale signs. Understanding volume’s role is crucial as such fluctuations might hint at traders either hopping in or out, suggesting possible exercises and assignments. 

Navigating the Post-Assignment Terrain

Grasping the ripple effects of option assignment is vital, highlighting the immediate responsibilities and potential paths for both the buyer and seller.

For the Option Seller:

  • Call Option Assignment : For a trader who’s sold a call option, assignment means they’re on the hook to hand over the underlying shares at the strike price. If they’re short on shares, a market purchase is in order—potentially at a loss if market prices overshoot the strike.
  • Put Option Assignment: Assignment on a peddled put option necessitates the trader to buy the shares at the strike price . If this price overshadows the market rate, losses loom.

For the Option Buyer:

  • Call Option Play : Exercising a call lets the buyer snap up shares at the strike price. They can either nestle with them or trade them off.
  • Put Option Play: Exercising a put gives the buyer the reins to sell their shares at the strike price. This play often pays off when the market rate is dwarfed by the strike, ensuring a tidy profit on the dispensed shares.

Post-assignment, all involved must be on their toes, knowing what triggers margin calls , especially if caught off-guard by the assignment. Tax implications may also hover, influenced by the trade’s nature and the tenure of the position.

Being savvy about these subtleties and gearing up for possible turns of events can drastically refine one’s journey through the options trading maze. 

Call Option Assignment Scenario

Imagine an investor purchases an Nvidia ( NVDA ) call option at a strike price of $435, hoping that the price of the stock will ascend after finding out that they may be forced to move out of some countries . The option is set to expire in a month. Soon after, not only did NVDA rebound from the news, but they reported very strong quarterly earnings, propelling the stock to $455.

Spotting the favorable trend, the investor opts to wield their right to purchase the stock at the agreed strike price of $435, despite its $455 market value. This initiates the option assignment.

The other investor, having sold the option, must now part with their NVDA shares at $435 apiece. If they’re short on stocks, they’d have to fetch them at the going rate of $455 and let them go at a deficit. The first investor, however, stands at a crossroads: retain the shares in hopes of further gains or swiftly trade them at $455, reaping a neat sum. 

Put Option Assignment Scenario

Let’s visualize an investor who speculates a dip in the share price of V.F. Corporation ( VFC ) after seeing news about an activist investor causing shares to jump almost 14% in a day . To hedge their bets, they secures a put option from another investor at a strike price of $18.50, set to lapse in a month.

Fast forward a week, let’s say VFC divulges lackluster quarterly figures, causing the stock to dive to $10. The first investor, seizing the moment, employs their put option, electing to sell their shares at the $18.50 strike price.

When the assignment bell tolls, the other investor finds himself bound to buy the shares from the first investor at the agreed $18.50, a rate that overshadows the current $10 market value. The first investor thus sidesteps the market slump, securing a favorable sale. The other investor, however, absorbs a loss, acquiring stocks at a premium to their market worth.

The realm of options trading is akin to navigating a dynamic river, demanding a sharp comprehension of the risks that lie beneath its surface. A predominant risk that traders often encounter is assignment risk. When one assumes the role of an option seller, they inherit the duty to honor the contract if the buyer opts to exercise. Grasping the gravity of this can make the difference, underscoring the necessity of adept risk management.

A savvy approach to temper assignment risk is by keeping a vigilant eye on the extrinsic value of options. Generally, options rich in extrinsic value tend to resist early assignment. This resistance emerges as the extrinsic value dwindles when the option dives deeper in-the-money, thereby tempting the holder to exercise.

Furthermore, economic currents, ranging from niche corporate updates to sweeping market tides, can be triggers for option assignments. Staying attuned to these economic ripples equips traders with the vision needed to either tweak or maintain their positions. For example, traders may opt to sidestep selling options that are deeply in-the-money, given their higher susceptibility to assignments due to their shrinking extrinsic value.

Incorporating spread tactics, like vertical spreads  or iron condors, furnishes an added shield. These strategies can dampen the risk of assignment since one part of the spread frequently balances the risk of its counterpart. Should the specter of a short option assignment hover, traders might contemplate ‘rolling out’ their stance. This move entails repurchasing the short option and subsequently selling another, possibly at a varied strike rate or a more distant expiry.

Yet, despite these protective layers, it remains pivotal for traders to brace for possible assignments. Maintaining ample liquidity, be it in capital or necessary shares, can avert unfavorable scenarios like hasty liquidations or stiff margin charges. Engaging regularly with brokers can also shed light, occasionally offering a heads-up on looming assignments.

In conclusion, the bedrock of risk management in options trading is rooted in perpetual learning. As traders hone their craft, their adeptness at forecasting and navigating assignment risks sharpens.

In the intricate world of options trading, option assignments aren’t just nuanced details; they’re pivotal moments with deep-seated implications for individual traders and the health of their portfolios. Beyond the immediate financial aftermath, assignments can reshape trading plans, risk dynamics, and the overarching path of an investor’s journey.

At its core, option assignments can transform a trader’s asset landscape. Consider a trader who’s short on a call option. If they’re assigned, they might be compelled to supply the underlying stock. This can result in a rapid stock outflow from their portfolio or, if they don’t possess the stock, birth a short stock stance. On the flip side, a trader short on a put option who faces assignment may find themselves buying the stock at the strike price, thereby dipping into their cash reserves.

These immediate shifts can generate broader portfolio ripples. An unexpected gain or shedding of stocks can jostle a trader’s asset distribution, veering it off their envisioned path. If, for instance, a trader had charted a particular stock-to-cash distribution or a meticulous diversification blueprint, an option assignment might throw a spanner in the works.

Additionally, assignments can serve as a real-world litmus test for a trader’s risk-handling prowess . A surprise assignment might spark margin calls for those not sufficiently fortified with capital. It stands as a poignant nudge about the essence of ensuring liquidity and safeguarding against the unpredictable whims of the market.

Strategically speaking, recurrent assignments might signal it’s time for traders to recalibrate. Are the options they’re offloading too submerged in-the-money? Have they factored in pivotal market shifts that might heighten early exercise odds? Such reflective moments can pave the way for refining and elevating trading methods. 

In the multifaceted world of options trading, option assignment stands out as both a potential boon and a challenge. Far from being a simple checkbox in the process, its ramifications can mold the contours of a trader’s portfolio and steer long-term tactics. The importance of comprehending and adeptly managing option assignment resonates, whether you’re dipping your toes into options for the first time or weaving through intricate trades with seasoned expertise. 

Furthermore, mastering options trading is about integrating its myriad concepts into a cohesive playbook. Whether it’s differentiating trading strategies like the iron condor from the iron butterfly strategy or delving deep into the nuances of option assignments, each component enriches the narrative of a trader’s odyssey. As markets shift and new hurdles arise, a solid grasp of foundational principles remains an invaluable asset. In this perpetual dance of learning and evolution, may your trading maneuvers always be well-informed, proactive, and adept. 

Understanding Options Assignment: FAQs

What factors influence the likelihood of an option being assigned.

Several factors come into play, including the option’s intrinsic value , the time remaining until expiration, and upcoming dividend announcements. Options that are deep in the money or nearing their expiration date are more likely to be assigned.

Are Some Option Styles More Prone to Assignment than Others?

Absolutely. When considering different option styles , it’s essential to note that American-style options can be exercised at any point before their expiration, which means they face a higher risk of early assignment. In contrast, European-style options can only be exercised at expiration.

How Do Current Market Trends Impact Assignment Risk?

Factors like market volatility, notable price shifts, and external economic happenings can amplify the chances of an option being assigned. For example, an option might be assigned before a company’s ex-dividend date if the expected dividend outweighs the weakening of theta decay .

Can Traders Reverse or Counter the Effects of an Option Assignment?

Once an option has been assigned, it’s set in stone. However, traders can maneuver within the market to balance out the implications of the assignment, such as procuring or selling the underlying asset.

Are There Any Fees Tied to Option Assignments?

Indeed, brokers usually impose a fee for both assignments and exercises. The specific fee can differ depending on the broker, making it essential for traders to understand their brokerage’s charging scheme.

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Options Exercise, Assignment, and More: A Beginner's Guide

assignment risk options

So your trading account has gotten options approval, and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then expiration day approaches and, at the time, XYZ is trading at $105.30.

Wait. The stock's above the strike. Is that in the money 1 (ITM) or out of the money 2  (OTM)? Do I need to do something? Do I have enough money in my account? Help!

Don't be that trader. The time to learn the mechanics of options expiration is before you make your first trade.

Here's a guide to help you navigate options exercise 3 and assignment 4 —along with a few other basics.

In the money or out of the money?

The buyer ("owner") of an option has the right, but not the obligation, to exercise the option on or before expiration. A call option 5 gives the owner the right to buy the underlying security; a put option 6  gives the owner the right to sell the underlying security.

Conversely, when you sell an option, you may be assigned—at any time regardless of the ITM amount—if the option owner chooses to exercise. The option seller has no control over assignment and no certainty as to when it could happen. Once the assignment notice is delivered, it's too late to close the position and the option seller must fulfill the terms of the options contract:

  • A long call exercise results in buying the underlying stock at the strike price.
  • A short call assignment results in selling the underlying stock at the strike price.
  • A long put exercise results in selling the underlying stock at the strike price.
  • A short put assignment results in buying the underlying stock at the strike price.

An option will likely be exercised if it's in the option owner's best interest to do so, meaning it's optimal to take or to close a position in the underlying security at the strike price rather than at the current market price. After the market close on expiration day, ITM options may be automatically exercised, whereas OTM options are not and typically expire worthless (often referred to as being "abandoned"). The table below spells it out.

  • If the underlying stock price is...
  • ...higher than the strike price
  • ...lower than the strike price
  • If the underlying stock price is... A long call is... -->
  • ...higher than the strike price ...ITM and typically exercised -->
  • ...lower than the strike price ...OTM and typically abandoned -->
  • If the underlying stock price is... A short call is... -->
  • ...higher than the strike price ...ITM and typically assigned -->
  • If the underlying stock price is... A long put is... -->
  • ...higher than the strike price ...OTM and typically abandoned -->
  • ...lower than the strike price ...ITM and typically exercised -->
  • If the underlying stock price is... A short put is... -->
  • ...lower than the strike price ...ITM and typically assigned -->

The guidelines in the table assume a position is held all the way through expiration. Of course, you typically don't need to do that. And in many cases, the usual strategy is to close out a position ahead of the expiration date. We'll revisit the close-or-hold decision in the next section and look at ways to do that. But assuming you do carry the options position until the end, there are a few things you need to consider:

  • Know your specs . Each standard equity options contract controls 100 shares of the underlying stock. That's pretty straightforward. Non-standard options may have different deliverables. Non-standard options can represent a different number of shares, shares of more than one company stock, or underlying shares and cash. Other products—such as index options or options on futures—have different contract specs.
  • Stock and options positions will match and close . Suppose you're long 300 shares of XYZ and short one ITM call that's assigned. Because the call is deliverable into 100 shares, you'll be left with 200 shares of XYZ if the option is assigned, plus the cash from selling 100 shares at the strike price.
  • It's automatic, for the most part . If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option. In such a case, it's possible that a short ITM position might not be assigned. For more, see the note below on pin risk 7 ?
  • You'd better have enough cash . If an option on XYZ is exercised or assigned and you are "uncovered" (you don't have an existing long or short position in the underlying security), a long or short position in the underlying stock will replace the options. A long call or short put will result in a long position in XYZ; a short call or long put will result in a short position in XYZ. For long stock positions, you need to have enough cash to cover the purchase or else you'll be issued a margin 8 call, which you must meet by adding funds to your account. But that timeline may be short, and the broker, at its discretion, has the right to liquidate positions in your account to meet a margin call 9 . If exercise or assignment involves taking a short stock position, you need a margin account and sufficient funds in the account to cover the margin requirement.
  • Short equity positions are risky business . An uncovered short call or long put, if assigned or exercised, will result in a short stock position. If you're short a stock, you have potentially unlimited risk because there's theoretically no limit to the potential price increase of the underlying stock. There's also no guarantee the brokerage firm can continue to maintain that short position for an unlimited time period. So, if you're a newbie, it's generally inadvisable to carry an options position into expiration if there's a chance you might end up with a short stock position.

A note on pin risk : It's not common, but occasionally a stock settles right on a strike price at expiration. So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next business day.

But it goes beyond the exact price issue. What if an option is ITM as of the market close, but news comes out after the close (but before the exercise decision deadline) that sends the stock price up or down through the strike price? Remember: The owner of the option could submit a DNE request.

The uncertainty and potential exposure when a stock price and the strike price are the same at expiration is called pin risk. The best way to avoid it is to close the position before expiration.

The decision tree: How to approach expiration

As expiration approaches, you have three choices. Depending on the circumstances—and your objectives and risk tolerance—any of these might be the best decision for you.

1. Let the chips fall where they may.  Some positions may not require as much maintenance. An options position that's deeply OTM will likely go away on its own, but occasionally an option that's been left for dead springs back to life. If it's a long option, the unexpected turn of events might feel like a windfall; if it's a short option that could've been closed out for a penny or two, you might be kicking yourself for not doing so.

Conversely, you might have a covered call (a short call against long stock), and the strike price was your exit target. For example, if you bought XYZ at $100 and sold the 110-strike call against it, and XYZ rallies to $113, you might be content selling the stock at the $110 strike price to monetize the $10 profit (plus the premium you took in when you sold the call but minus any transaction fees). In that case, you can let assignment happen. But remember, assignment is likely in this scenario, but it is not guaranteed.

2. Close it out . If you've met your objectives for a trade, then it might be time to close it out. Otherwise, you might be exposed to risks that aren't commensurate with any added return potential (like the short option that could've been closed out for next to nothing, then suddenly came back into play). Keep in mind, there is no guarantee that there will be an active market for an options contract, so it is possible to end up stuck and unable to close an options position.

The close-it-out category also includes ITM options that could result in an unwanted long or short stock position or the calling away of a stock you didn't want to part with. And remember to watch the dividend calendar. If you're short a call option near the ex-dividend date of a stock, the position might be a candidate for early exercise. If so, you may want to consider getting out of the option position well in advance—perhaps a week or more.

3. Roll it to something else . Rolling, which is essentially two trades executed as a spread, is the third choice. One leg closes out the existing option; the other leg initiates a new position. For example, suppose you're short a covered call on XYZ at the July 105 strike, the stock is at $103, and the call's about to expire. You could attempt to roll it to the August 105 strike. Or, if your strategy is to sell a call that's $5 OTM, you might roll to the August 108 call. Keep in mind that rolling strategies include multiple contract fees, which may impact any potential return.

The bottom line on options expiration

You don't enter an intersection and then check to see if it's clear. You don't jump out of an airplane and then test the rip cord. So do yourself a favor. Get comfortable with the mechanics of options expiration before making your first trade.

1 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price. For calls, it's any strike lower than the price of the underlying equity. For puts, it's any strike that's higher.

2 Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.

3 An options contract gives the owner the right but not the obligation to buy (in the case of a call) or sell (in the case of a put) the underlying security at the strike price, on or before the option's expiration date. When the owner claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option.

4 Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock. For every option trade there is a buyer and a seller; in other words, for anyone short an option, there is someone out there on the long side who could exercise.

5 A call option gives the owner the right, but not the obligation, to buy shares of stock or other underlying asset at the options contract's strike price within a specific time period. The seller of the call is obligated to deliver, or sell, the underlying stock at the strike price if the owner of the call exercises the option.

6 Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the options contract's strike price within a specific time period. The put seller is obligated to purchase the underlying security at the strike price if the owner of the put exercises the option.

7 When the stock settles right at the strike price at expiration.

8 Margin is borrowed money that's used to buy stocks or other securities. In margin trading, a brokerage firm lends an account owner a portion of the purchase price (typically 30% to 50% of the total price). The loan in the margin account is collateralized by the stock, and if the value of the stock drops below a certain level, the owner will be asked to deposit marginable securities and/or cash into the account or to sell/close out security positions in the account.

9 A margin call is issued when your account value drops below the maintenance requirements on a security or securities due to a drop in the market value of a security or when a customer exceeds their buying power. Margin calls may be met by depositing funds, selling stock, or depositing securities. Charles Schwab may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in the interests of both parties.  

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Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled " Characteristics and Risks of Standardized Options " before considering any options transaction. Supporting documentation for any claims or statistical information is available upon request.

With long options, investors may lose 100% of funds invested. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.

Short options can be assigned at any time up to expiration regardless of the in-the-money amount.

Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss.

Commissions, taxes, and transaction costs are not included in this discussion but can affect final outcomes and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Short selling is an advanced trading strategy involving potentially unlimited risks and must be done in a margin account. Margin trading increases your level of market risk. For more information, please refer to your account agreement and the Margin Risk Disclosure Statement.

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Everything You Need to Know About Options Assignment Risk

assignment risk options

By Pat Crawley

The  fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account if you’re undercapitalized.

But in this article, we're going to show you why early assignment is a vastly overblown fear, why it's not the end of the world, and what to do if it does occur.

What is Assignment in Options Trading?

Do you remember reading beginner  options books  or articles that said, "an option gives the buyer the right, but not the obligation, to buy/sell a stock at a specified price and date?" Well, it's accurate, but only for the buy side of the contract.

The seller of an option is actually obligated to buy or sell should the buyer choose to exercise their contract. So when options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

Let's say you sold a call option on a stock with a strike price of $50, which you held until expiration. At expiration, the stock trades at $55, meaning it's automatically exercised by the buyer. In this case, you are forced to sell the buyer 100 shares at $50 per share.

So when selling options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

What is Early Assignment in Options Trading?

Early assignment is when the buyer of an options contract that you're short decides to exercise the option before the expiration and begins the assignment process.

Many beginning traders count early assignments as one of their biggest trading fears. Many traders' fear of early assignment stems from their lack of understanding of the process. Still, it's typically not something to worry about, and we'll show you why in this article. But first, let's look at an example of how the process works.

For instance, say we collect $1 in premium to short a 30-day put option on XYZ with a strike price of $45 while the underlying is trading at $50. Fast forward, and it's the morning of expiration day. Options will expire at the close of trading in a few hours. The underlying stock is hovering around $44.85. Our plan pretty much worked as planned until, for some reason, the holder of the option exercises the option. We're confused and don't know what's going on.

It works exactly the same way as ordinary options settlement . You fulfill your end of the bargain. As the seller of a put option, you sold the right to sell XYZ at $45. The option buyer exercised that right and sold his shares to you at $45 per share.

And now, let's break down what happened in this transaction:

  • You collected $1 in premium when opening the contract  
  • The buyer of the option exercises his right to sell at $45 per share.  
  • You’re now long 100 shares of XYZ that you paid $45 for, and you sell them at the market price of $44.80 per share, realizing a $0.20 per share loss.  
  • Your profit on the transaction is $0.80 because you pocketed $1 from the initial sale of the option but lost $0.20 from selling the 100 shares from assignment at a loss.

Why Early Assignment is Nothing to Fear

Many beginning traders count early assignments as one of their biggest trading fears; on some level, it makes sense. As the seller of an option, you're accepting the burden of a legitimate obligation to your counterparty in exchange for a premium. You're giving up control, and the early assignment shoe can, on paper, drop at any time.

Exercising Options Early Burns Money

People rarely exercise options early because it simply doesn't make financial sense. By exercising an option, you're only capturing the option's intrinsic value and entirely forfeiting the extrinsic value to the option seller. There's seldom a reason to do this.

Let's put ourselves in the buyer's shoes. For instance, we pay $5 for a 30-day call with a strike price of $100 while the underlying is trading at $102. The call has $2 in intrinsic value, meaning our call is in-the-money by $2, which would be our profit if the option expired today.

The other $3 of the option price is extrinsic value. This is the value of time, volatility, and convexity. By exercising early, the buyer of an option is burning that $3 of extrinsic value just to lock in the $2 profit.

A much better alternative would be to sell the option and go and buy 100 shares of the stock in the open market.

Viewed in this light, an option seller can’t be blamed for looking at early assignment as a good thing, as they get to lock in their premium as profit.

Your Risk Doesn’t Change

One of the biggest worries about early assignment is that being assigned will somehow open the trader up to additional risk. For instance, if you’re assigned on a short call position, you’ll end up holding a short position in the underlying stock.

However, let me prove that the maximum risk in your positions stays the same due to early assignment.

How Early Assignment Doesn’t Change Your Position’s Maximum Risk

Perhaps you collect $2.00 in premium for shorting an ABC $50/$55 bear call spread. In other words, we're short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50.

Before considering early assignment, let's determine our maximum risk on this call spread. The maximum risk for a bear call spread is the difference between the strike minus the net credit you receive. In this case, the difference between the strikes is $5, and we collect a net credit of $2, making our maximum risk on the position $3 or $300.

You wake up one morning with the underlying trading at $58 to find that the counterparty of your short $50 call has exercised its option, giving them the right to buy the underlying stock at $50 per share.

You'd end up short due to being forced to sell the buyer shares at $50. So you're short 100 shares of ABC with a cost basis of $50 per share. On that position, your P&L is -$800, the P&L on a $55 long call is +$250, on account of you paying $0.50, and the call being $3.00 in-the-money. And finally, because the option holder exercised early, you get to keep the entire credit you collected to sell the $50 call, so you've collected +$250.

So your P&L is $300. You've reached your max loss. Let's get extreme here. Suppose the price of the underlying runs to $100. Here are the P&Ls for each leg of the trade:

  • Short stock: -$5,000  
  • Long call: +$4,450  
  • Net credit received from exercised short option: +$250  
  • 5,000 - (4,450 + 250) = $300

While dealing with early assignments might be a hassle, it doesn’t open a trader up to additional risk they didn’t sign up for.

Margin Calls Usually Aren’t The End of the World

Getting a margin call due to early assignment isn't the end of the world. Believe it or not, stock brokerages have been around for a long time. They have seen early assignments many times before, and they have protocols for it.

Think about it intuitively, your broker allowed you to open the short option position knowing that the capital in your account could not cover an early assignment. Still, they let you make the trade anyways.

So what happens when you get an early assignment that you can’t cover? Your broker issues you a margin call. Once you’re in violation of their margin rules, they pretty much have carte blanche to handle the situation as they wish, including liquidating the assigned stock position at their will.

However, most brokers will give you some time to react to the situation and either decide to deposit more capital, liquidate the position on your own, or exercise offsetting options to fulfill the margin call in the case of an option spread.

Even though a margin call isn't fun, remember that the overall risk of your position doesn't change due to an early assignment, and it's typically not a momentous event to deal with. You probably just have to liquidate the trade.

When Early Assignment Might Occur?

Dividend Capture

One of the few times it might make sense for a trader to exercise an option early is when he's holding a call that is deep in-the-money, and there's an upcoming ex-dividend date.

Because deep ITM calls have very little extrinsic value (because their deltas are so high), any negligible extrinsic value is often outweighed by the value of an upcoming dividend payment , so it makes sense to exercise and collect the dividend.

Deep In-The-Money Options Near Expiration

While it's important to emphasize that the risk of early assignment is very low in most cases, the likelihood does rise when you're dealing with options with very little extrinsic value, like deep-in-the-money options. Although, even in those cases, the probabilities are pretty low.

However, an options trader that is trading to exploit market anomalies like the volatility risk premium, in which implied volatility tends to be overpriced, shouldn't even be trading deep-in-the-money options anyhow. Profitable option sellers tend to sell options with very little intrinsic value and tons of extrinsic value.

Bottom Line

Don't let the  fear of early assignment discourage you from selling options. Far worse things when shorting options! While it's true that early assignment can occur, it's typically not a big deal. Related articles

  • Can Options Assignment Cause Margin Call?
  • Assignment Risks To Avoid
  • The Right To Exercise An Option?
  • Options Expiration: 6 Things To Know
  • Early Exercise: Call Options
  • Expiration Surprises To Avoid
  • Assignment And Exercise: The Mental Block
  • Should You Close Short Options On Expiration Friday?
  • Fear Of Options Assignment
  • Day Before Expiration Trading
  • Accurate Expiration Counting

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What is Options Assignment & How to Avoid It

options assignment explained

If you are learning about options, assignment might seem like a scary topic. In this article, you will learn why it really isn’t. I will break down the entire options assignment process step by step and show you when you might be assigned, how to minimize the risk of being assigned, and what to do if you are assigned.

Video Breakdown of Options Assignment

Check out the following video in which I explain everything you need to know about assignment:

What is Assignment?

To understand assignment, we must first remember what options allow you to do. So let’s start with a brief recap:

  • A call option gives its buyer the right to buy 100 shares of the underlying at the strike price
  • A put option gives its buyer the right to sell 100 shares of the underlying at the strike price

In other words, call options allow you to call away shares of the underlying from someone else, whereas a put option allows you to put shares in someone else’s account. Hence the name call and put option.

The assignment process is the selection of the other party of this transaction. So the person that has to buy from or sell to the option buyer that exercised their option.

Note that an option buyer has the right to exercise their option. It is not an obligation and therefore, a buyer of an option can never be assigned. Only option sellers can ever be get assigned since they agree to fulfill this obligation when they sell an option.

Let’s go through a specific example to clarify this:

  • The underlying security is stock ABC and it is trading at $100.
  • Peter decides to buy 1 put option with a strike price of 95 as a hedge for his long stock position in ABC
  • Kate sells this exact same option at the same time.

Over the next few weeks, ABC’s price goes down to $90 and Peter decides to exercise his put option. This means that he uses his right to sell 100 shares of ABC for $95 per share. Now Kate is assigned these 100 shares of ABC which means she is obligated to buy them for $95 per share. 

options exercise and assignment

Peter now has 100 fewer shares of ABC in his portfolio, whereas Kate has 100 more.

This process is analog for a call option with the only difference being that Kate would be short 100 shares and Peter would have 100 additional shares of ABC in his portfolio.

Hopefully, this example clarifies what assignment is.

Who Can Be Assigned?

To answer this question, we must first ask ourselves who exercises their option? To do this, let’s quickly look at the different ways that you can close a long option position:

  • Sell the option: Selling an option is probably the easiest way to close a long option position. Doing this will have no effect on the option seller.
  • Let the option expire: If the option is Out of The Money , it would expire worthless and there would be no consequence for the option seller. If, on the other hand, the option is In The Money by more than $0.01, it would typically be automatically exercised . This would start the options assignment process.
  • Exercise the option early: The last possibility would be to exercise the option before its expiration date. This, however, can only be done if the option is an American-style option. This would, once again, lead to an option assignment.

So as an option seller, you only have to worry about the last two possibilities in which the buyer’s option is exercised. 

options assignment statistic

But before you worry too much, here is a quick fact about the distribution of these 3 alternatives:

Less than 10% of all options are exercised.

This means 90% of all options are either sold prior to the expiration date or expire worthless. So always remember this statistic before breaking your head over the risk of being assigned.

It is very easy to avoid the first case of being assigned. To avoid it, just close your short option positions before they expire (ITM). For the second case, however, things aren’t as straight forward.

Who Risks being Assigned Early?

Firstly, you have to be trading American-style options. European-style options can only be exercised on their expiration date. But most equity options are American-style anyway. So unless you are trading index options or other kinds of European-style options, this will be the case for you.

Secondly, you need to be an options seller. Option buyers can’t be assigned.

These two are necessary conditions for you to be assigned. Everyone who fulfills both of these conditions risks getting assigned early. The size of this risk, however, varies depending on your position. Here are a few things that can dramatically increase your assignment risk:

  • ITM: If your option is ITM, the chance of being assigned is much higher than if it isn’t. From the standpoint of an option buyer, it does not make sense to exercise an option that isn’t ITM because this would lead to a loss. Nevertheless, it is possible. The deeper ITM the option is, the higher the assignment risk becomes.
  • Dividends : Besides that, selling options on securities with upcoming dividends also increases your risk of assignment. More specifically, if the extrinsic value of an ITM call option is less than the amount of the dividend, option buyers can achieve a profit by exercising their option before the ex-dividend date. 
  • Extrinsic Value: Otherwise, keep an eye on the extrinsic value of your option. If the option has extrinsic value left, it doesn’t make sense for the option buyer to exercise their option because they would achieve a higher profit if they just sold the option and then bought or sold shares of the underlying asset. Typically, the less time an option has left, the lower its extrinsic value becomes. Implied volatility is another factor that influences extrinsic value.
  • Puts vs Calls: This is more of an interesting side note than actual advice, but put options tend to get exercised more often than call options. This makes sense since put options give their buyer the right to sell the underlying asset and can, therefore, be a very useful hedge for long stock positions.

How can you Minimize Assignment Risk?

Since you now know what assignment is, and who risks being assigned, let’s shift our focus on how to minimize the assignment risk. Even though it isn’t possible to completely remove the risk of being assigned, there are things that you can do to dramatically decrease the chances of being assigned.

The first thing would be to avoid selling options on securities with upcoming dividend payments. Before putting on a position, simply check if the underlying security has any upcoming dividend payments. If so, look for a different trade.

If you ever are in the position that you are short an option and the ex-dividend of the underlying security is right around the corner, compare the size of the dividend to the extrinsic value of your option. If the extrinsic value is less than the dividend amount, you really should consider closing the position. Otherwise, the chances of being assigned are high. This is especially bad since being short during a dividend payment of a security will force you to pay the dividend.

Besides avoiding dividends, you should also close your option positions early. The less time an option has left, the lower its extrinsic value becomes and the more it makes sense for option buyers to exercise their options. Therefore, it is good practice to close your (ITM) short option positions at least one week before the expiration date.

The deeper an option is ITM, the higher the chances of assignment become. So the just-mentioned rule is even more important for deep ITM options.

If you don’t want to indefinitely close your position, it is also possible to roll it out to a later expiration cycle. This will give you more time and add extrinsic value to your position.

FAQs about Assignment

Last but not least, I want to answer some frequently asked questions about options exercise and assignment.

1. What happens if your account does not have enough buying power to cover the assigned position?

This is a common worry for beginning options traders. But don’t worry, if you don’t have enough capital to cover the new position, you will receive a margin call and usually, your broker will just automatically close the assigned shares immediately. This might lead to a minor assignment fee, but otherwise, it won’t significantly affect your account. Tatsyworks, for example, charges an assignment fee of only $5.

Check out my review of tastyworks

2. How does assignment affect your P&L?

When an option is exercised, the option holder gains the difference between the strike price and the price of the underlying asset. If the option is ITM, this is exactly the intrinsic value of the option. This means that the option holder loses the extrinsic value when he exercises his/her option. That’s also why it doesn’t make sense to exercise options with a lot of extrinsic value left.

options assignment extrinsic value

This means that as soon as the option is exercised, it is only the intrinsic value that is relevant for the payoff. This is the same payoff as the option at its expiration date.

So as an options seller, your P&L isn’t negatively affected by an assignment. Either it stays the same or it becomes slightly better due to the extrinsic value being ignored.

As an example, if your option is ITM by $1, you will lose up to $100 per option or $1 per share that you are assigned. But this does not account for the extrinsic value that falls away with the exercise of the option. So this would be the same P&L as at expiration. Depending on how much premium you collected when selling the option, this might still be a profit or a minor loss.

With that being said, as soon as you are assigned, you will have some carrying risk. If you don’t or can’t close the position immediately, you will be exposed to the ongoing price fluctuations of that security.  Sometimes, you might not be able to close the new position immediately because of trading halts, or because the market is closed.

If you weren’t planning on holding that security, it is a good idea to close the new position as soon as possible. 

Option spreads such as vertical spreads, add protection to these price fluctuations since you can just exercise the long option to close the assigned share position at the strike price of the long option.

3. When an option holder exercises their option, how is the assignment partner chosen?

random options assignment process

This is usually a random process. As soon as an option is exercised, the responsible brokerage firm sends a request to the Options Clearing Corporation (OCC). They send back the requested shares, whereafter they randomly choose another brokerage firm that currently has a client that is short the exercised option. Then the chosen broker has to decide which of their clients is assigned. This choice is, once again, random or a time-based priority system is used.

4. How does assignment work for index options?

As there aren’t any shares of indexes, you can’t directly be assigned any shares of the underlying asset. Therefore, index options are cash-settled. This means that instead of having to buy or sell shares of the underlying, you simply have to pay the difference between the strike price and the underlying trading price. This makes assignment easier and a lot less likely among index options.

Note that ETF options such as SPY options are not cash-settled. SPY is a normal security with openly traded shares, so exercise and assignment work just like they do among equity options.

options assignment dont panic

I hope this article made you realize that assignment isn’t as bad as it might seem at first. It is just important to understand how the options assignment process works and what affects the likelihood of being assigned.

To recap, here’s what you should to do when you are assigned:

if you have enough capital in your account to cover the position, you could either treat the new position as a normal (stock) position and hold on to it or you could close it immediately. If you don’t have a clear trading plan for the new position, I recommend the latter.

If, on the other hand, you don’t have enough buying power, you will receive a margin call from your broker and the position should be closed automatically.

Assignment does not have any significant impact on your P&L, but it comes with some carrying risk. Options spreads can offer more protection against this than naked option positions.

To mitigate assignment risk, you should close option positions early, always keep an eye on the extrinsic value of your option positions, and avoid upcoming dividend securities.

And always remember, less than 10% of options are exercised, so assignment really doesn’t happen that often, especially not if you are actively trying to avoid it.

For the specifics of how assignment is handled, it is a good idea to contact your broker, as the procedures can vary from broker to broker.

Thank you for taking the time and reading this post. If you have any questions, comments, or feedback, please let me know in the comment section below.

22 Replies to “What is Options Assignment & How to Avoid It”

hi there well seems like finally there is one good honest place. seem like you are puting on the table the whole truth about bad positions. however my wuestion is when can one know where to put that line of limit. when do you recognise or understand that you are in a bad position? thanks and once again, a great site.

Well If you are trading a risk defined strategy the point would be at max loss and not too much time left until expiration. For undefined risk strategies however it can be very different. I would just say if you don’t have too much time until expiration and are far from making money you should use some common sense and admit that you are wrong.

What would happen in the event of a crash. Would brokers be assigning, options, cashing out these shares, and making others bankrupt. Well, I guessed I sort of answered my own question. Its not easy to understand, especially not knowing when this would come up. But seems like you hit the important aspects of the agreement.

Actually I wouldn’t imagine that too many people would want to exercise their options in case of a market ctash, because they probably wouldn’t want to hold stocks in this risky and volatile environment. 

And to the part of the questions: making others bankrupt. This really depends on the situation. You can’t get assigned more stock than your option covers. This means as long as you trade with reasonable position sizing nothing too bad can happen. Otherwise I would recommend to trade with defined risk strategies so your maximum drawdown is capped.

Thanks for writing about assignment Louis. After reading the section how assignment works, I feel I am somewhat unclear about how assignment works when the exerciser exercises Put or Call option. In both cases, if the underlying is an index, is the settlement done through the margin account money? Would you be able to provide a little more detail of how exercising the option (Put vs Call) would work in case of an underlying stock vs Index.

Thank you very much in advance

Thanks for the question. Indexes can’t be traded in the same way as stocks can. That’s why index options are settled in cash. If your index option is assigned, you won’t have to buy or sell any shares of the underlying index at the strike price because there exist no shares of indexes. Instead, you have to pay the amount that your index option is ITM to the exerciser of your option. Let me give you an example: You are short a call option with the strike price of 1000. The underlying asset is an index and it’s price is 1050. This means your call option is 50 points ITM. If someone exercises your long call option, you will have to pay him/her the difference between the strike price and the underlying’s price which would be 50 (1050-1000). So the main difference between index and stock options is that you don’t have to buy/sell any shares of the underlying asset for index options. I hope this helps. Please let me know if you have any other questions or comments.

Can the same logic be applied for ETFs as it does Indexes? For example, if I trade the SPY ETF, would it be settled in cash?

Thanks! Johnson

Hi Johnson, Exercise and assignment for ETFs such as SPY work just like they do for equities. ETFs have shares that are openly traded, whereas indexes don’t. That’s why indexes are settled in cash, whereas ETFs aren’t. I hope this helps.

There are many articles online that I read that are biased against options tradings and I am a bit surprised to read a really helpful article like this. I find this helpful in understanding options trading, what are the techniques and how to manage the risks. Before, I was hesitant to try this financial game but now, after reading this article, I am considering participating with live accounts and no longer with a demo account. A few months ago, I signed up with a company called IQ Options, but really never involved real money and practiced only with a demo account.

Thanks for your comment. I am glad to see that you liked the post. However, I don’t recommend sing IQ Option to trade since they are a very shady trading firm. You could check out my  Review of IQ Option for all the details.

this is a great and amazing article. i sincerely your effort creating time  to write on such an informative article which has taught me a lot more on what is options assignment and avoiding it. i just started trading but had no ideas on this as a beginner. i find this article very helpful because it has given me more understanding on options trading and knowing the techniques and how to manage the risks. thanks for sharing this amazing article

You are very welcome

Hello, the first thing that i noticed when i opened this page is the beauty of the website. i am sure you have put much effort into creating this article and the details are really clear here. after watching the video break down, i fully understood the entire process on how to avoid options assignment.

Thank you so much for the positive feedback!

I would love to create a website like yours as the design used is really nice, simple and brings about clarity of the write ups, but then you wrote a brilliant article on how to avoid options assignment. great video here. it was  confusing at first. i will suggest another video be added to help some people like me.

Thanks for the feedback. I recommend checking out my  options trading beginner course . In it, I cover all the basics that weren’t explained here.

Thanks for your very helpful article. I am contemplating selling a call that would cover half my shares on company X. How can ensure that the assignment process selects the shares that I bought at a higher price, so as to maximize capital losses?

Hi Luis, When you are assigned, you just automatically buy/sell shares of the underlying at the strike price. This means your overall portfolio is adjusted by these 100 shares. The exact shares and your entry price are irrelevant. If you have 50 shares of X and your short call is assigned, you will sell 100 shares of X at the strike price. After this, your position would be -50 shares of X which would be equivalent to being short 50 shares of X. I hope this helps.

Louis, I entered a CALL butterfly spread at $100 below where I intended, just 2 days before expiration date. I intended to speculate on a big earning announcement jump the next day. It was a debit of 1.25. Also, when I realized my mistake, I tried to close it for anything at all. The Mark fluctuated between 40 and 70, but I could not get it to close. So now I am assigned to sell 200 share at 70 dollars below the market price of the stock. I am having a heart attack. I do not have the 200 shares to deliver, so it seems I have to buy them at the market, and sell them for $70 less, for a loss of $14,000.

What other options are open to me? Can my trading firm force a close with a friendly market maker and make it as if it happened on Friday? I am willing to pay a friendly market maker several hundred dollars to make this trade. Is that an option? Other options the trading firm can do for me that would cost me less than $14,000?

Hi Paul, Thanks for your comment. From the limited information provided, it is hard to say what is actually going on. If you bought a call butterfly spread, your max loss should be limited to the premium you paid to open the position. An assignment shouldn’t have a huge impact on your overall P&L. I highly recommend contacting your broker and explaining your situation to them since they have all the information required to evaluate what’s actually going on. But if the loss is real, there is no way for you to make a deal with a market maker to limit or undo potential losses. I hope this helps.

What happens with ITM long call option that typically gets automatically exercised at expiration, if the owner of the call option doesn’t have the cash/margin to cover the stock purchase?

He would receive a margin call

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Options 101: Options Dividend Risk and How to Avoid It

Brandon Chapman 1 Comment

November 24, 2020

assignment risk options

Dividends Meet Options

If you’ve made an option trade, you’ve probably seen the disclaimer warning of potential dividend risk. Most probably gloss over that information and never consider how their option trades could be impacted. However, we got flooded with emails last week asking questions about this type of risk, which was a great to see. In response to the quest for information on this subject, I took one of my sessions last week to outline the risks and some rules of thumb. Now I’m bringing this information to the blog!

assignment risk options

Dividend dates

Before you can really have a discussion of dividend risk in options, you need to understand the relevant dates. A company will frequently declare a dividend following their earnings report. This declaration includes a the amount along with the record date and the pay date.

The record date is when the company will record all of their shareholders of record. That makes sense that they’re not doling out cash to just anybody, but what does it take to become a shareholder of record?

In order to understand this, you need to understand the process of being officially recognized as a shareholder. This is usually described as T+2 or trade plus two days. For virtually all non-OTC stocks it takes two days following the trade date for you to be officially recognized as the shareholder of record.

Understanding T+2 allows you to arrive at the ex-dividend date. The ex-dividend date is the date in which the stock is purchased, you won’t be recognized as shareholder of record on the record date. This is the date the stock will drop by approximately the amount of the dividend. For example, if the dividend is $1, the stock will fall by approximately $1 on the ex-dividend date. That means that you would need to purchase the stock the day before the ex-dividend date in order to get recognized and paid. The image below breaks this down.

assignment risk options

Dividend Risk

Now that you know the dates of interest, let’s talk about how it impacts the options. Here are a few affects to consider:

  • Extrinsic value of the options is adjusted for the decline in the stock price on the ex-dividend date
  • Traders who are short on the ex-dividend date have to pay the dividend
  • Short calls are the only option that carries “dividend risk”

Since the stock declines on the ex-dividend date, the call option extrinsic value will be lowered relative to the put option extrinsic. If the dividend is big enough, it will require the strikes to be adjusted as in what typically happens following.

The process for shorting involves borrowing the shares from the broker and selling it. That means that margin account holders at the broker may have just had their stock sold and the dividend would need to be replaced. In this circumstance, the trader who is short shares of the underlying stock will be replacing the dividend.

You may be wondering why call sellers are exposed to dividend risk. This happens because of the obligation of the call seller. The call option buyer has the right to buy 100 shares of the underlying stock per contract. Since the call option seller was paid the premium, they are then obligated to provide the shares to the call option buyer if exercised. Depending on when the option is exercised, this may cause the call option seller to be short 100 shares of the stock per contract if the shares aren’t currently owned.

Dividend Risk & Assignment

The risk of an option seller of having an early assignment occur on the day before the ex-dividend date is where the risk comes in. That means that the call option seller becomes short shares of stock on the ex-dividend date. As was already discussed, that means that they will pay the dividend. This can be particularly troublesome if the short call was part of a spread trade and the dividend is particularly large. This could cause you to lose more than your max loss.

In order to better understand this, let’s talk about when early assignment of a call option is likely to occur. Here are a couple of conditions that makes the chance more likely:

  • Short call is in-the-money (ITM)
  • Extrinsic value of the call is less than the dividend

There is no incentive to exercise an out-of-the-money (OTM) call option. This is because the call option buyer who exercised will be paying more for the stock than it is selling in the market. That means only ITM calls will likely be exercised.

When an option is exercised, the option owner will only realize the intrinsic value of the call option and the extrinsic value is lost. That means that they would need to be compensated for their loss. This is where consideration of the dividend is important. In this case, the dividend would need to replace the lost extrinsic value at a minimum.

Dividend Risk Example

Here is an example using Huntington Ingalls Industries Inc (NYSE: HII). The company is set to go ex-dividend on November 25, and they pay a $1.14 dividend. Looking at the option chain for the December expiration will give you a sense of which options might have a greater chance of being exercised early.

assignment risk options

As you look at the extrinsic value column, you’ll notice that the 18 DEC 20 $155 call strike price has extrinsic value of $0.54. That amount is much less than the dividend of $1.14, which means that there is some risk of early exercise. The $160 call option has $2.09, which won’t be able to be replaced and so has very little chance of early exercise. In this case, all of the strike prices at $155 or less has a chance of early exercise.

What would typically happen is that the option would be exercised Tuesday afternoon. This would leave the option seller short on the ex-dividend date on Wednesday. That event would require the call option seller to pay the dividend.

It’s important to understand dividend risk as a call option seller. This will allow you to know when you should close a trade early. Hopefully, this will prevent the potential for early assignment and being short on the ex-date. This is a big reason for selling OTM call options and having rules surrounding closing before expiration. This helps prevent the instances where early exercise will be more likely. Hopefully, this serves as a primer on the subject to help keep you from having to accidentally pay the dividend in the future.

Learn how to deal with uncertain markets by learning about the  Vomma Zone . Not a subscriber? Become a  TheoTrade  member.

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Stephen Brennom

Good topic with a clear explanation. Thanks. On an anecdotal note for a stock that isn't wanted as a holder, with the advent of no-fee stock trades, low-or-no-cost options trades and no assignment fees, there can be some circumstances when setting up and executing a combo covered call a few days before the ex-div date and embracing early assignment rather than avoiding it can produce a better return than a comparable cash-covered Put sale.

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Understanding Pin Risk and How It Works in Options Trading

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

assignment risk options

What Is Pin Risk?

Pin risk is the uncertainty that arises over whether an options contract will be exercised (or assigned) when the expiration price of the underlying security is at or very close to the option's strike price. This is known as pinning a strike ; for example, if XYZ stock expires at $50 the 50-strike would be pinned.

Pinning a strike imposes a risk for options traders, who may become uncertain about exercising  their long options, which have expired at the money (ATM) or very close to being at the money. Part of their hesitancy is also due to the simultaneous uncertainty of the number of similar short positions they will be  assigned on. Because of this, options holders may experience losses when the market opens on the next trading day based on how many long contracts they exercised and how many shorts they ended up being assigned on.

Key Takeaways

  • Pin risk is the risk to options traders that the underlying security will close at or very close to the strike price of expiring options positions held.
  • The risk is that it is unclear how many long options should be exercised and how many shorts they will be assigned on.
  • This uncertainty can create positions that are implicitly held unhedged over the weekend, with the risk of the market moving against them and wiping away their expected gains.
  • A pinned position is hard to effectively hedge against.

Understanding Pin Risk

Pin risk is the risk an option seller experiences as expiration approaches and the price of the underlying asset is near to being in the money (ITM) after expiration. This risk is actually a complex puzzle because if the underlying expires even a small amount out of the money (OTM), the option writer's profit is the total premium collected, but if the underlying is in the money even a small amount, the seller may be assigned by a long who exercises that option.

In such an event, the option converts into a short for the seller (if a call has been sold) or a long (if a put ) position on the underlying. Since the underlying security itself will not trade until the market opens, the option seller is now exposed to the possibility that the underlying will gap unfavorably against them. Depending on how large the gap is, it could create substantial losses.

In the moments before the market closes ahead of expiration, the option seller does not know exactly how to hedge the position heading into expiration, and almost any hedge they choose will substantially erode their potential profits.

Pinning refers to the potential for institutional option buyers to manipulate price action in the underlying as options expiration approaches. If these option buyers face the potential for a total loss of the option, they may try to pin the stock to a price just in the money by strategically entering buy orders at the last minute before the close. If unsuccessful, these attempts represent a significant risk to those trying to pin the stock, but if successful, it can represent a substantial risk to the option sellers.

 Pinning the strike happens most frequently when there is a large amount of open interest in the calls and puts of a particular strike as expiration approaches.

Pin Risk May Result in Market Risk

It is worth restating that the risk to the options seller is that they do not know for certain whether the holder will exercise the options, leaving them with either a long or a short position in the underlying. Putting on a hedge against such a position will also leave the options seller with market risk if the option is not exercised.

Therefore, neither party knows exactly how to hedge their positions. At one stock price, they have no need for hedges, but at a different price, they could have exposure to market risk, typically over a weekend, that they will have to buy or sell the underlying when trading resumes Monday to flatten out the position.

For example, say the purchaser of a $30 call wishes to exercise the option to buy the stock if it closes at this price at expiration. If the position is not covered by the writer, it will end up with a short position in the stock and all the risks associated with this position. The reverse is true for a put, leaving the writer of the option with a long position that is potentially going to lose money.

Example of Pin Risk

Let's say XYZ stock is trading at $30.10 on the last day of trading, and there is a great deal of open interest in the 30 strike calls and puts. Say that Trader A is long the calls and Trader B is short calls. As the trading day comes to a close, the stock falls steadily to exactly $30.00, where it closes.

Trader A would normally exercise the options if they were ITM, profiting from the difference in the strike price (where they would purchase the shares) and the market price where the shares could be sold. But, at exactly $30 there is no profit to be had and so Trader A is uncertain whether to exercise the contracts. Trader B should expect the options to expire worthless, but since they do not know if or how many calls Trader A will exercise, they cannot be sure this will be the case and, if assigned, instead of worthless options they would receive a short position in XYZ shares from $30.00.

assignment risk options

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Investing - Adobe

Different Ways to Think About Investment Risk

May 16, 2024 — 05:30 pm EDT

Written by Phil Mackintosh and Robert Jankiewicz

You may have heard people say that investing involves a tradeoff between risk vs. return. And that’s typically true. Investors usually need to take on greater risk to achieve higher returns.  

But what do investors really mean when they talk about risk? 

It turns out there are a few different ways to think about risk. Today, we look at some common ways that risk is typically measured. 

Is it the risk of loss? 

Most investors probably think risk is related to the risk of ‘loss,’ whether that’s a percentage loss or the amount of money an investor could potentially lose. 

For example,  Chart 1  below tracks the historic  drawdowns  for the S&P 500 (based on SPY) from 1993 to the present. Drawdowns reflect the cumulative loss that an investment has experienced from its peak. 

What we see is that drawdowns: 

  • Of 5% are reasonably common. 
  • Reaching 10%, commonly known as a “correction,” happen much less often. 
  • Exceeded 20%, commonly known as a “bear market,” in four separate periods - two of which saw the index fall around 50% (in the Dot-com bust and the Great Financial Crisis of 2008). 

Knowing that you may lose half of your investments is important. However, focusing only on the downside misses all the upside. Over this whole period, an investor saw price gains of around 1800%, or around 10% per year (despite all the drawdowns). 

Chart 1: Drawdown Risk for the S&P 500 since 1993  

Drawdown Risk for the S&P 500 since 1993 

What is volatility? 

Professional investors, instead, typically think about portfolio risk in terms of uncertainty or the range of possible outcomes. Often, they measure a portfolio’s volatility to understand its risk. 

Volatility is a  per-annum  measure of the  standard deviation  of  daily  returns. This sounds complicated, but let’s break it down. 

First, an easy way to think about the standard deviation of daily returns is to look at the daily returns of the two stocks plotted below. In the chart below, where each day’s return is a dot, the: 

  • Blue stock  has returns that are clustered in a tight range. Visually, the average deviation looks to be close to ±1% from a zero daily return. In fact, the standard deviation is 1.3% per day. 
  • Orange stock  has a much wider range of returns. That translates to a much higher standard deviation, at 4.0% per day, making that stock “more risky.”  

As this shows, standard deviation is a statistical measure that simply quantifies how much returns deviate from their average each day. 

Chart 2: Low risk vs. high risk  

Low risk vs. high risk

What does standard deviation in daily returns really mean? 

One of the interesting features of returns in most financial assets is that “small moves” are typically much more common than “large moves.” We see that for drawdowns in Chart 1 and even for the dots in Chart 2 above.  

For example, if we look at daily returns for the S&P 500 over the past 30 years and count the different-sized daily returns (Chart 3), we see that:  

  • The highest bar is for slightly positive returns. 
  • The majority of days, the S&P returns around ±1%. In fact, the dark blue bars represent 68% of all dates. This is also statistically close to the standard deviation of daily returns, at around 1.2%. 
  • If we look at larger returns, the chart includes almost 95% of all dates (light and dark blue bars) at a level that is around double the standard deviation (around 2.4%). 
  • Some days have even better or worse returns (orange zones). The average return of all the negative orange bars is around -3.6%, which we will return to later. 

Chart 3: The historic distribution of daily S&P 500 returns  

The historic distribution of daily S&P 500 returns

What we are looking at in Chart 3 is a “distribution” of realized returns. This is close to what statisticians call a “ normal distribution, ” which has a number of predictable properties, even over longer timeframes, and is used as a base for options pricing math. 

What happens to daily standard deviation over longer times?  

Interestingly, if we look at the distribution of actual returns over longer periods (say weekly or monthly), we see a similar pattern ( Chart 4) . But there are a few things are worth noting: 

  • Deviation of returns increases at a decreasing rate:  The range of one-year returns is much less than 252 days x one-day range. This is due to mean reversion of  news  and, ultimately, traders based on relative valuations. 
  • Average market returns are positive:  In fact, the average becomes more positive the longer the time window. This makes sense given the stock market tends to increase over time, too. 
  • Deviation of returns is still both above and below zero . Although very good returns start to exceed very bad returns over longer timeframes, there are still many 12-month periods with quite negative returns. 

Chart 4: The historic distribution of S&P 500 returns over increasingly longer periods  

The historic distribution of S&P 500 returns over increasingly longer periods

Volatility is a per-annum risk measure 

When professional investors talk about “volatility,” they are talking about the expected portfolio distribution as a “per-annum” number. Although that is similar to the 252 trading days return shown in the chart above, it is actually calculated using daily returns. 

The math to “annualize” the standard deviation of daily returns is: 

Volatility = Daily Standard Deviation x square root (# of days). 

For example, if we use the data from Chart 3, where the standard deviation of daily returns was 1.2%, we get expected volatility of the index of around 19% per annum: 

Volatility = 1.2% x square root (252) = 1.2% x 15.9 = ~19% 

Not surprisingly, 19% is also pretty close to the average value of the VIX index over the past 30 years. In fact, the average daily VIX level was 19.8 over the period. Although these two measures of volatility are related, they are not the same: 

  • The VIX represents what options traders are expecting future volatility to be. 
  • While volatility uses the actual (or historical) daily returns. 

Importantly, this doesn’t mean an investor stands to lose (or gain) 19% in a year. What it really means is that the portfolio will return somewhere between ±19% in 2 out of every three years. That’s similar to looking at the dark blue area in the charts above. 

In the other one-third of the years, the returns will be stronger, sometimes much stronger, than that – as we see in the light blue and yellow bars. 

What is Value at Risk? 

Professional risk managers might be more concerned with large losses than the range suggested by portfolio volatility. For example, an investor may have a limited amount of reserves or a set tolerance for a large daily loss. 

Two common ways to measure the cost of large losses build upon the statistical approaches we noted above: 

  • Sortino Ratio  is a variation of the Sharpe Ratio but only considers downside deviation. As we noted above, standard deviation moves in both directions, positive and negative. The Sharpe Ratio measures returns relative to total volatility, whereas the Sortino Ratio only considers “bad” volatility, or downside risk. 
  • Value at Risk (VaR)  calculates an  average dollar loss  in times when a portfolio is expected to experience an extreme return.   For example, in Chart 3 above, we note that the “average loss” in the orange zone was -3.6%. That means a $1 million portfolio would have a 95% “VaR” of around $36,000 per day (3.6% x $1 million). 

Both of these methods use the concept of uncertainty in returns but focus on the negative returns. In the case of VaR, the focus is quantifying the average losses on the “worst” of all expected returns. 

Understanding and managing risk affects portfolio returns 

Overall, risk is a key concept in finance.  

While most people think of risk in terms of losses, practitioners generally use statistical measures that have to do with measuring the range of outcomes, or “uncertainty” of returns. 

Either way, risk and return are fundamental tradeoffs for investors – as usually a portfolio with higher returns is more risky (meaning losses can also be higher).  

Investors should know that there are also a number of ways to reduce risks in a portfolio – including diversification, which can reduce volatility, and buying  options  to  protect  a portfolio against losses. 

Phil Mackintosh

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  1. Options Assignment Risk

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  2. Assignment Risk Explained

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  3. Options Assignment Risk. What is the options assignment risk?

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  4. Everything You Need to Know About Options Assignment Risk

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  5. Indicators of Early Assignment Risk

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VIDEO

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COMMENTS

  1. Understanding options assignment risk

    Understanding assignment risk in Level 3 and 4 options strategies. With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned, either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a ...

  2. Dividends and Options Assignment Risk

    Ways to avoid the risk of early assignment. If you are selling options (covered or uncovered), there is always the risk of being assigned if your trade moves against you. This risk is higher if the underlying security involved pays a dividend. However, there are ways to reduce the likelihood of being assigned early.

  3. Trading Options: Understanding Assignment

    Options trading carries risk and requires specific approval from an investor's brokerage firm. ... An option assignment represents the seller's obligation to fulfill the terms of the contract by either selling or buying the underlying security at the exercise price. This obligation is triggered when the buyer of an option contract exercises ...

  4. Assignment Risk on 'Limited Risk' Options Spreads

    A limited risk option spread, like a debit spread, credit spread, covered call, or iron condor, is built by writing (selling) options, and at the same time, buying (long) different options to create the desired options strategy. When you write options, either naked or covered within a spread, those options are at risk of being exercised by the ...

  5. The Risks of Options Assignment

    The Risks of Options Assignment. October 23, 2023. Before entering an options trade, traders should consider the possibility of early assignment. Learn more about assignment and how to help reduce the risks associated with it. Any trader holding a short option position should understand the risks of early assignment.

  6. The Assignment Risks of Writing Call and Puts

    The option writer is always at risk of early assignment at any time through expiration for American-style options. There are several types of assignment risk factors you should understand: In-the-money early exercise. a. Dividend considerations. Exercise at expiration. a. After-hours trading. b.

  7. Options Assignment Explained (2024): Complete Trader's Guide

    A savvy approach to temper assignment risk is by keeping a vigilant eye on the extrinsic value of options. Generally, options rich in extrinsic value tend to resist early assignment. This resistance emerges as the extrinsic value dwindles when the option dives deeper in-the-money, thereby tempting the holder to exercise.

  8. Options Exercise, Assignment, and More: A Beginner's Guide

    A note on pin risk: It's not common, but occasionally a stock settles right on a strike price at expiration.So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next ...

  9. How Option Assignment Works: Understanding Options Assignment

    Traders selling American-style options are at risk of assignment anytime on or before the expiration date. While they can technically be assigned anytime, the option must be ITM for the owner of ...

  10. What Is Option Assignment & How Does It Work?

    Options assignment is just another risk to be mindful of when selling puts and calls. While there are plenty of upshots to writing options, such as collecting premium , assignment risk is present. It's important that you check with your brokerage firm to know their option assignment process and cut-off times.

  11. What is Option Assignment? How and Why Assignment Happens

    If assigned a call option, you must sell 100 shares per contract at the option's strike price. Conversely, if you are assigned a put option, you're required to buy 100 shares per contract at the option's strike price. As an option seller, assignment risk is something you must understand, but it is not as scary as many think.

  12. Dividend Assignment Risk: Short Call Options

    Either way, they've secured a risk-free profit of at least $28. The short call option seller is required to pay the $72 dividend on the payment date since they were short shares on the ex-dividend date. Remember, option assignment is random and can happen at any time for options with any moneyness. Out-of-the-money calls can also be assigned.

  13. Everything You Need to Know About Options Assignment Risk

    By Pat Crawley February 21, 2023. assignment; The fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account ...

  14. Option Assignment Risk Explained

    To get the transcript, go to: https://www.rockwelltrading.com/coffee-with-markus/options-assignment-risk/When selling options, you always need to be aware of...

  15. Options Assignment & How To Avoid It

    The deeper ITM the option is, the higher the assignment risk becomes. Dividends: Besides that, selling options on securities with upcoming dividends also increases your risk of assignment. More specifically, if the extrinsic value of an ITM call option is less than the amount of the dividend, option buyers can achieve a profit by exercising ...

  16. ASSIGNMENT RISK IN OPTIONS TRADING (HOW IT WORKS & HOW TO ...

    In today's video I want to talk about assignment risk in options trading. Any time you sell to open an option, there is risk of assignment, even if it doesn'...

  17. Options Assignment Risk

    An early options assignment is most likely to happen if a call option is deep in the money and the stock's ex-dividend date is around the corner. If your acc...

  18. Early Exercise Options Strategy

    But understanding the pros and cons of early exercise can make you more aware of when you might beat risk of early assignment. The likelihood of a short option being assigned early depends on whether the option you sold is a call or a put. So let's examine each separately. Three reasons not to exercise calls early Keep your risk limited. If ...

  19. Eliminate Assignment and Exercise Risk with Index Options

    Eliminating a low probability but potentially severe risk of assignment and exercise risk can lead investors to a shorter learning curve and more consistent results. Additionally, with the launch ...

  20. Options Assignment Risk. What is the options assignment risk?

    As an options contract nears expiration, the risk of options assignment increases exponentially. When an options contract has been purchased, it can usually be sold before expiration to prevent an assignment. However, options contracts that have been sold pose the opposite risk. If you have sold a put contract for example, and the options ...

  21. Options 101: Options Dividend Risk and How to Avoid It

    The risk of an option seller of having an early assignment occur on the day before the ex-dividend date is where the risk comes in. That means that the call option seller becomes short shares of stock on the ex-dividend date. As was already discussed, that means that they will pay the dividend. This can be particularly troublesome if the short ...

  22. Understanding Pin Risk and How It Works in Options Trading

    Pin Risk: A risk that the writer of an options or futures contract faces when the price of the underlying asset closes at or very near the exercise price of the contract upon expiration.

  23. Early Options Assignment Risk (When to Worry & When to Chill)

    💰 Get up to $3,000 when you open and fund your first tastytrade brokerage account: https://geni.us/tastytrade🔥 Learn data-driven options strategies: https:...

  24. Different Ways to Think About Investment Risk

    Knowing that you may lose half of your investments is important. However, focusing only on the downside misses all the upside. Over this whole period, an investor saw price gains of around 1800% ...

  25. The 'secret' auto insurance you didn't know existed

    Way.com looks into assigned risk pools, a lesser-known insurance option for higher-risk drivers offered. ... While the assigned risk pool is an option for 'high-risk' drivers, it also gives ...

  26. Devon Energy Buy Write Drills Into Upcoming Dividend With 33% ...

    If we earn the dividend and DVN closes above $48 on June 28, we will be assigned and earn $1.55 per share on $46.80 per share at risk, or 3.31%. Over a 36-day period, that would be an annualized ...