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.
If it's at expiration | If it's at expiration |
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This means your account must have enough money to buy the shares of the underlying at the strike price or you may incur a margin call. Actions you can take: If you don’t have the money to pay for the shares, you can buy the put option before it expires, closing out the position and eliminating the risk of assignment and the risk of a margin call. |
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)
If the and the at expiration |
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This means your account will deliver shares of the underlying—i.e., sell them at the strike price. Actions you can take: If you don’t have the shares to sell, or don’t want to establish a short stock position, you can buy the short call before expiration, closing out the position. If the short leg is closed before expiration, the long leg may also be closed, but it will likely not have any value and can expire worthless. |
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
If the and the at expiration |
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This means your account will buy shares of the underlying at the strike price. Actions you can take: If you don’t have the money to pay for the shares, or don’t want to, you can buy the put option before it expires, closing out the position and eliminating the risk of assignment. Once the short leg is closed, you can try to sell the long leg if it has any value, or let it expire worthless if it doesn’t. |
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.
Long call + short call
If the and the at expiration |
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This means your account will buy shares at the long call’s strike price. Actions you can take: If you don’t have enough money in your account to pay for the shares, or you don’t want to, you can simply sell the long call option before it expires, closing out the position. However, unless you are approved for Level 4 options trading, you must close out the short leg first (or simultaneously). The easiest way to do this is to use the spread order ticket to buy to close the short leg and sell to close the long leg. Assuming the short leg is worth less than $0.10, the E*TRADE Dime Buyback program would apply, and you’ll pay no commission to close that leg. |
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
If the and the at expiration |
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This means your account will buy shares at the long call’s strike price. Actions you can take: If you don’t have the shares, the automatic exercise would create a short position in your account. To avoid this, you can simply sell the put option before it expires, closing out the position. However, you may not have the buying power to close out the long leg unless you close out the short leg first (or simultaneously). The easiest way to do this is to use the spread order ticket to buy to close the short leg and sell to close the long leg. Assuming the short leg is worth less than $0.10, the E*TRADE Dime Buyback program would apply, and you’ll pay no commission to close that leg. |
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.
(when all legs are in-the-money or all are out-of-the-money)
If all legs are at expiration | If all legs are at expiration |
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For call spreads, this will buy shares at the long call’s strike price and sell shares at the short call’s strike price. For put spreads, this will sell shares at the long put strike price and buy shares at the short put strike price. In either case, this will happen in the account after expiration, usually overnight, and is called . Your account does not need to have money available to buy shares for the long call or short put because the sale of shares from the short call or long put will cover the cost. There will be no Fed call or margin call. |
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.
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Any trader holding a short option position should understand the risks of early assignment. An early assignment occurs when a trader is forced to buy or sell stock when the short option is exercised by the long option holder. Understanding how assignment works can help a trader take steps to reduce their potential losses.
An option gives the owner the right but not the obligation to buy or sell stock at a set price. An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice:
For traders with long options positions, it's possible to choose to exercise the option, buying or selling according to the contract before it expires. With a long call exercise, shares of the underlying stock are bought at the strike price while a long put exercise results in selling shares of the underlying stock at the strike price.
There are two components to the price of an option: intrinsic 1 and extrinsic 2 value. In the case of exercising an in-the-money 3 (ITM) long call, a trader would buy the stock at the strike price, which is lower than its prevailing price. In the case of a long put that isn't being used as a hedge for a long stock position, the trader shorts the stock for a price higher than its prevailing price. A trader only captures an ITM option's intrinsic value if they sell the stock (after exercising a long call) or buy the stock (after exercising a long put) immediately upon exercise.
Without taking these actions, a trader takes on the risks associated with holding a long or short stock position. The question of whether a short option might be assigned depends on if there's a perceived benefit to a trader exercising a long option that another trader has short. One way to attempt to gauge if an option could be potentially assigned is to consider the associated dividend. An options seller might be more likely to get assigned on a short call for an upcoming ex-dividend if its time value is less than the dividend. It's more likely to get assigned holding a short put if the time value has mostly decayed or if the put is deep ITM and close to expiration with a wide bid/ask spread on the stock.
It's possible to view this information on the Trade page of the thinkorswim ® trading platform. Review past dividends, the price of the short call, and the price of the put at the call's strike price. While past performance cannot be relied upon to continue, this information can help a trader determine whether assignment is more or less likely.
If a trader has a covered call that's ITM and it's assigned, the trader will deliver the long stock out of their account to cover the assignment.
A trader with a call vertical spread 4 where both options are ITM and the ex-dividend date is approaching may want to exercise the long option component before the ex-dividend date to have long stock to deliver against the potential assignment of the short call. The trader could also close the ITM call vertical spread before the ex-dividend date. It might be cheaper to pay the fees to close the trade.
Another scenario is a call vertical spread where the ITM option is short and the out-of-the-money (OTM) option is long. In this case, the trader may consider closing the position or rolling it to a further expiration before the ex-dividend date. This move can possibly help the trader avoid having short stock on the ex-dividend date and being liable for the dividend.
Depending on the situation, a trader long an ITM call might decide it's better to close the trade ahead of the ex-dividend date. On the ex-dividend date, the price of the stock drops by the amount of the dividend. The drop in the stock price offsets what a trader would've earned on the dividend and there would still be fees on top of the price of the put.
When an option is converted to stock through exercise or assignment, the position's risk profile changes. This change could increase the margin requirements, or subject a trader to a margin call, 5 or both. This can happen at or before expiration during early assignment. The exercise of a long option position can be more likely to trigger a margin call since naked short option trades typically carry substantial margin requirements.
Even with early exercise, a trader can still be assigned on a short option any time prior to the option's expiration.
1 The intrinsic value of an options contract is determined based on whether it's in the money if it were to be exercised immediately. It is a measure of the strike price as compared to the underlying security's market price. For a call option, the strike price should be lower than the underlying's market price to have intrinsic value. For a put option the strike price should be higher than underlying's market price to have intrinsic value.
2 The extrinsic value of an options contract is determined by factors other than the price of the underlying security, such as the dividend rate of the underlying, time remaining on the contract, and the volatility of the underlying. Sometimes it's referred to as the time value or premium value.
3 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the underlying asset's price is above the strike price. A put option is ITM if the underlying asset's price is below the strike price. For calls, it's any strike lower than the price of the underlying asset. For puts, it's any strike that's higher.
4 The simultaneous purchase of one call option and sale of another call option at a different strike price, in the same underlying, in the same expiration month.
5 A margin call is issued when the 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 buying power is exceeded. Margin calls may be met by depositing funds, selling stock, or depositing securities. A broker may forcibly liquidate all or part of the account without prior notice, regardless of 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.
Spread trading must be done in a margin account.
Multiple leg options strategies will involve multiple commissions.
Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome 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.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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Automatic exercise/ assignment, early exercise/assignment, without the jargon, what are options, what are the types of options, what are the greeks, similar articles, options pricing, equity option basics, equity index options.
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Your first assignment: decoding this important options term before you start trading.
The options market can seem to have a language of its own. To the average investor, there are likely a number of unfamiliar terms, but for an individual with a short options position—someone who has sold call or put options—there is perhaps no term more important than " assignment "—the fulfilling of the requirements of an options contract.
When someone buys options to open a new position ("Buy to Open"), they are buying a right —either the right to buy the underlying security at a specified price (the strike price) in the case of a call option, or the right to sell the underlying security in the case of a put option.
Image source: Getty Images
On the flip side, when an individual sells, or writes, an option to open a new position ("Sell to Open"), they are accepting an obligation —either an obligation to sell the underlying security at the strike price in the case of a call option or the obligation to buy that security in the case of a put option. When an individual sells options to open a new position, they are said to be "short" those options. The seller does this in exchange for receiving the option's premium from the buyer.
American-style options allow the buyer of a contract to exercise at any time during the life of the contract, whereas European-style options can be exercised only during a specified period just prior to expiration. For an investor selling American-style options, one of the risks is that the investor may be called upon at any time during the contract's term to fulfill its obligations. That is, as long as a short options position remains open, the seller may be subject to "assignment" on any day equity markets are open.
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 their right to buy or sell the underlying security.
To ensure fairness in the distribution of American-style and European-style option assignments, the Options Clearing Corporation (OCC), which is the options industry clearing house, has an established process to randomly assign exercise notices to firms with an account that has a short option position. Once a firm receives an assignment, it then assigns this notice to one of its customers who has a short option contract of the same series. This short option contract is selected from a pool of such customers, either at random or by some other procedure specific to the brokerage firm.
While an option seller will always have some level of uncertainty, being assigned may be a somewhat predictable event. Only about 7% of options positions are typically exercised, but that does not imply that investors can expect to be assigned on only 7% of their short positions. Investors may have some, all or none of their short positions assigned.
And while the majority of American-style options exercises (and assignments) happen on or near the contract's expiration, a long options holder can exercise their right at any time, even if the underlying security is halted for trading. Someone may exercise their options early based upon a significant price movement in the underlying security or if shares become difficult to borrow as the result of a pending corporate action such as a buyout or takeover.
Note: European-style options can only be exercised during a specified period just prior to expiration. In U.S. markets, the majority of options on commodity and index futures are European-style, while options on stocks and exchange-traded funds (ETF) are American-style. So, while SPDR S&P 500 , or SPY options, which are options tied to an ETF that tracks the S&P 500, are American-style options, S&P 500 Index options, or SPX options, which are tied to S&P 500 futures contracts, are European-style options.
An investor who is assigned on a short option position is required to meet the terms of the written option contract upon receiving notification of the assignment. In the case of a short equity call, the seller of the option must deliver stock at the strike price and in return receives cash. An investor who doesn't already own the shares will need to acquire and deliver shares in return for cash in the amount of the strike price, multiplied by 100, since each contract represents 100 shares. In the case of a short equity put, the seller of the option is required to purchase the stock at the strike price.
It is normal to see an account balance fluctuate after opening a short option position. Investors who have questions or concerns or who do not understand reported trade balances and assets valuations should contact their brokerage firm immediately for an explanation. Please keep in mind that short option positions can incur substantial risk in certain situations.
What does "XYZ July 50" mean? XYZ = the ticker symbol of the security July = the month when the option will expire 50 = $50, the strike price on the option
For example, say XYZ stock is trading at $40 and an investor sells 10 contracts for XYZ July 50 calls at $1.00, collecting a premium of $1,000, since each contract represents 100 shares ($1.00 premium x 10 contracts x 100 shares). Consider what happens if XYZ stock increases to $60, the call is exercised by the option holder and the investor is assigned. Should the investor not own the stock, they must now acquire and deliver 1,000 shares of XYZ at a price of $50 per share. Given the current stock price of $60, the investor's short stock position would result in an unrealized loss of $9,000 (a $10,000 loss from delivering shares $10 below current stock price minus the $1,000 premium collected earlier).
Note: Even if the investor's short call position had not been assigned, the investor's account balance in this example would still be negatively affected—at least until the options expire if they are not exercised. The investor's account position would be updated to reflect the investor's unrealized loss—what they could lose if an option is exercised (and they are assigned) at the current market price. This update does not represent an actual loss (or gain) until the option is actually exercised and the investor is assigned.
American-style option holders have the right to exercise their options position prior to expiration regardless of whether the options are in-, at- or out-of-the-money. Investors can be assigned if any market participant holding calls or puts of the same series submits an exercise notice to their brokerage firm. When one leg is assigned, subsequent action may be required, which could include closing or adjusting the remaining position to avoid potential capital or margin implications resulting from the assignment. These actions may not be attractive and may result in a loss or a less-than-ideal gain.
If an investor's short option is assigned, the investor will be required to perform in accordance with their obligation to purchase or deliver the underlying security, regardless of the overall risk of their position when taking into account other options that may be owned as part of the overall multi-leg strategy. If the investor owns an option that serves to limit the risk of the overall spread position, it is up to the investor to exercise that option or to take other action to limit risk.
Below are a couple of examples that underscore how important it is for every investor to understand the risks associated with potential assignment during market hours and potentially adverse price movements in afterhours trading.
Example #1: An investor is short March 50 XYZ puts and long March 55 XYZ puts. At the close of business on March expiration, XYZ is priced at $56 per share, and both puts are out of the money, which means they have no intrinsic value. However, due to an unexpected news announcement shortly after the closing bell, the price of XYZ drops to $40 in after-hours trading. This could result in an assignment of the short March 50 puts, requiring the investor to purchase shares of XYZ at $50 per share. The investor would have needed to exercise the long March 55 puts in order to realize the gain on the initial multi-leg position. If the investor did not exercise the March 55 puts, those puts may expire and the investor may be exposed to the loss on the XYZ purchase at $50, a $10 per share loss with XYZ now trading at $40 per share, without receiving the benefit of selling XYZ at $55.
Example #2: An investor is short March 50 XYZ puts and long April 50 XYZ puts. At the close of business on March expiration, XYZ is priced at $45 per share, and the investor is assigned XYZ stock at $50. The investor will now own shares of XYZ at $50, along with the April 50 XYZ puts, which may be exercised at the investor's discretion. If the investor chooses not to exercise the April 50 puts, they will be required to pay for the shares that were assigned to them on the short March 50 XYZ puts until the April 50 puts are exercised or shares are otherwise disposed of.
Note: In either example, the short put position may be assigned prior to expiration at the discretion of the option holder. Investors can check with their brokerage firm regarding their option exercise procedures and cut-off times.
For options-specific questions, you may contact OCC's Investor Education team at [email protected] , via chat on OptionsEducation.org or subscribe to the OIC newsletter . If you have questions about options trading in your brokerage account, we encourage you to contact your brokerage firm. If after doing so you have not resolved the issue or have additional concerns, you can contact FINRA .
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FINRA Staff has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
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by Mike Scanlin
As the market nears closing time on expiration Friday, covered call writers want to know if they will be assigned or not for tax reasons, margin reasons, and portfolio optimization reasons. Let's look at the issue from the point of view of both people involved in the trade: the option holder who is long the call option, and the covered call writer who is short the same call option.
"Assignment" means the call option you sold short as part of your covered call trade is now being exercised. That means some option holder somewhere wants his stock and you have been chosen by the OCC (Options Clearing Corp) to receive the assignment. It's a random process; each time the OCC gets an exercise notice they randomly choose from among all the short calls (in the same series) who will receive the assignment.
If you are chosen by OCC your broker will be notified and your broker will, in turn, notify you. You will need to make good on your promise to deliver the shares of stock and, in exchange, receive the strike-price-per-share in cash, as per the option agreement.
It's really up to them. It's their option and they can do what they want with it. They can even exercise it if the stock price is below the strike price of the option (i.e. it's out of the money). It wouldn't make any economic sense to do so, but it is allowed. The option holder has the right to exercise at any time for any reason.
(1) The stock closes above the strike price on the option's expiration day.
This is the typical case for exercise. The option holder exercises his in-the-money option to acquire the stock for less than the current price. He only has to pay the strike price. If the stock closes at $43 and the strike price is 40, he only pays $40/share to acquire the stock.
(2) For in-the-money options, the day before ex-dividend day when there is zero time premium remaining in the option.
This is called "early exercise" and normally only happens when there is no time premium left in the option because the option holder forfeits any remaining time premium when he exercises. It doesn't make economic sense for him to exercise when there is still time premium remaining in the option; he's better off just selling the option in that case. But if there is zero time premium and he knows the stock is likely to open lower the next morning by the amount of the dividend that is about to be paid, he will do an early exercise to capture the dividend.
That's not a good time to exercise an option. There will be lots of time premium in the option (which will be forfeited if exercised) because of earnings uncertainty. If the option holder wants out of the position (maybe he's worried about volatility decreasing after earnings come out which could lower the value of his option) then he's better off just selling the option instead of exercising it.
This one is tricky.
For starters, stocks continue to trade for several hours in the aftermarket after the regular market closes. The stock's closing price Friday at 4pm Eastern Time (regular market hours closing) may not represent the closing price during extended hours trading. And option holders have until Saturday (when options technically expire) to give their brokers exercise notices. So it's possible for a stock to close just below the strike price during regular hours on expiration Friday but then close above the strike price in extended hours. In that case the option would likely be exercised.
But not always.
It depends on several factors: (1) What are the transaction costs of the person doing the exercising? (2) What is the personal opinion of the option holder for the stock at Monday morning's open? It's possible the option could finish slightly in the money during extended trading hours and still not be exercised because the option holder believes the stock will open lower (below the strike price) on Monday morning. Maybe there's some event happening over the weekend that he believes will cause the stock (or the whole market) to open lower on Monday.
Imagine a covered call that has been written at a strike of 50. On expiration Friday at the close the stock's price was within a few pennies of 50 (above or below; it doesn't matter). Will it be exercised?
It depends on what the option holder believes will happen Monday morning. And not all option holders believe the same thing, causing less than 100% of all 50-strike options to be exercised. And since option assignment is random, you can't be sure if you'll be assigned or not. The purple oval here is a mystery and subject to personal opinion:
The decision to exercise (or not) is the option holder's right but not his obligation . He can let in-the-money options expire unexercised if he so chooses, based on his beliefs of where the stock will open on the next trading day.
This is the most common question. The answer is "it depends", "do you feel lucky?", and "you can never tell for sure." If you don't want the stock called away for whatever reason (taxes, margin, etc) then buy the call option back before the option market closes. It may cost you a nickel or two (plus an option trade commission) but that's the only certain way to avoid assignment.
Remember, stocks trade for a few more hours after the regular market closes so if your stock closes 10 cents below the strike during regular hours but then rises 25 cents above the strike during extended hours then you are probably out of luck. It will likely be called away (unlike stocks, options don't trade after hours, so you can't buy the option back during extended trading hours).
If you are in a situation where you don't want something called away then the best plan is to monitor the amount of time premium remaining in the option. Most option holders won't exercise if the time premium is greater than zero. If your time premium is getting small (5 to 10 cents, depends on the bid-ask spread of the underlying stock) then it's a good time to roll the option to something that has more time premium in it. The greater the time premium the smaller chance of exercise.
The short answer for in-the-money options is (strike price + call price) minus stock price. So if the stock is 53 and you've sold a 50-strike call currently trading at 4 then the time premium is (50 + 4) - 53 = 1. There is 1 point of time premium in the option.
The longer answer is that stocks and options have bid prices and ask prices. So which to use? Or should you use the last trade price? We'll cover that in a future article . In the mean time, check out the tutorial on time premium .
Like covered calls? Check out our Covered Call Screener
Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.
How does assignment work, what it means for individual investors.
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An option assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.
An assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.
When you sell an option to someone, you’re selling them the right to make you engage in a future transaction. For example, if you sell someone a put option , you’re promising to buy a stock at a set price any time between when the transaction happens and the expiration date of the option.
If the holder of the option doesn’t do anything with the option by the expiration date, the option expires. However, if they decide that they want to go through with the transaction, they will exercise the option.
If the holder of an option chooses to exercise it, the seller will receive a notification, called an assignment, letting them know that the option holder is exercising their right to complete the transaction. The seller is legally obligated to fulfill the terms of the options contract.
For example, if you sell a call option on XYZ with a strike price of $40 and the buyer chooses to exercise the option, you’ll be assigned the obligation to fulfill that contract. You’ll have to buy 100 shares of XYZ at whatever the market price is, or take the shares from your own portfolio and sell them to the option holder for $40 each.
Options traders only have to worry about assignment if they sell options contracts. Those who buy options don’t have to worry about assignment because in this case, they have the power to exercise a contract, or choose not to.
The options market is huge, in that options are traded on large exchanges and you likely do not know who you’re buying contracts from or selling them to. It’s not like you sell an option to someone you know and they send you an email if they choose to exercise the contract, rather it is an organized process.
In the U.S., the Options Clearing Corporation (OCC), which is considered the options industry clearinghouse, helps to facilitate the exchange of options contracts. It guarantees a fair process of option assignments, ensuring that the obligations in the contract are fulfilled.
When an investor chooses to exercise a contract, the OCC randomly assigns the obligation to someone who sold the option being exercised. For example, if 100 people sold XYZ calls with a strike of $40, and one of those options gets exercised, the OCC will randomly assign that obligation to one of the 100 sellers.
In general, assignments are uncommon. About 7% of options get exercised, with the remaining 93% expiring. Assignment also tends to grow more common as the expiration date nears.
If you are assigned the obligation to fulfill an options contract you sold, it means you have to accept the related loss and fulfill the contract. Usually, your broker will handle the transaction on your behalf automatically.
If you’re an individual investor, you only have to worry about assignment if you’re involved in selling options. Even then, assignments aren't incredibly common. Less than 7% of options get assigned and they tend to get assigned as the option’s expiration date gets closer.
Having an option assigned does mean that you are forced to lock in a loss on an option, which can hurt. However, if you’re truly worried about assignment, you can plan to close your position at some point before the expiration date or use options strategies that don’t involve selling options that could get exercised.
The Options Industry Council. " Options Assignment FAQ: How Can I Tell When I Will Be Assigned? " Accessed Oct. 18, 2021.
Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
When is it time to exercise an option contract? That's a question that investors sometimes struggle with because it's not always clear if it's the optimal time to call (buy) the shares or put (sell) the stock when holding a long call option or a long put option.
There are a number of factors to consider when making the decision, including how much time value is remaining in the option, whether the contract is due to expire soon, and whether you really want to buy or sell the underlying shares .
When newcomers enter the options universe for the first time, they usually start by learning the various types of contracts and strategies. For example, a call option is a contract that grants its owner the right, but not the obligation, to buy 100 shares of the underlying stock by paying the strike price per share, up to the expiration date.
Conversely, a put option represents the right to sell the underlying shares.
The important thing to understand is that the option owner has the right to exercise . If you own an option, you are not obligated to exercise; it's your choice. As it turns out, there are good reasons not to exercise your rights as an option owner. Instead, closing the option (selling it through an offsetting transaction) is often the best choice for an option owner who no longer wants to hold the position.
While the holder of a long option contract has rights, the seller or writer has obligations. Remember, there are always two sides to an options contract: the buyer and the seller. The obligation of a call seller is to deliver 100 shares at the strike price . The obligation of a put seller is to purchase 100 shares at the strike price.
When the seller of an option receives notice regarding exercise, they have been assigned on the contract. At that point, the option writer must honor the contract if called upon to fulfill the conditions. Once the assignment notice is delivered, it is too late to close the position, and they are required to fulfill the terms of the contract.
The exercise and assignment process is automated and the seller, who is selected at random from the available pool of investors holding the short options positions, is informed when the transaction takes place. Thus, stock disappears from the account of the call seller and is replaced with the proper amount of cash; or stock appears in the account of the put seller, and the cash to buy those shares is removed.
Let's consider an example of a call option on XYZ Corporation with a strike price of 90, an expiration in October, and the stock trading for $99 per share. One call represents the right to buy 100 shares for $90 each, and the contract is currently trading for $9.50 per contract ($950 for one contract because the multiplier for stock options is 100).
A number of factors determine the value of an option, including the time left until expiration and the relationship of the strike price to the share price. If, for example, one contract expires in two weeks and another contract, on the same stock and same strike price, expires in six months, the option with six months of life remaining will be worth more than the one with only two weeks. It has greater time value remaining.
If a stock is trading for $99 and the Oct 90 call trades $9.50, as in the example, the contract is $9 in the money , which means that shares can be called for $90 and sold at $99, to make a $9 profit per share. The option has $9 of intrinsic value and has an additional 50 cents of time value if it is trading for $9.50. A contract that is out-of-the-money (say an Oct 100 call), consists only of time value.
It rarely makes sense to exercise an option that has time value remaining because that time value is lost. For example, it would be better to sell the Oct 90 call at $9.50 rather than exercise the contract (call the stock for $90 and then sell it at $99). The profit from selling 100 shares for a profit of $9 per share is $900 if the option is exercised, while selling a call at $9.50 equals $950 in options premium . In other words, the investor is leaving $50 on the table by exercising the option rather than selling it.
Furthermore, it rarely makes sense to exercise an out-of-the-money contract. For example, if the investor is long the Oct 100 call and the stock is $99, there is no reason to exercise the Oct 100 call and buy shares for $100 when the market price is $99.
When you own the call option, the most you can lose is the value of the option or $950 on the XYZ Oct 90 call. If the stock rallies , you still own the right to pay $90 per share, and the call will increase in value. It is not necessary to own the shares to profit from a price increase, and you lose nothing by continuing to hold the call option. If you decide you want to own the shares (instead of the call option) and exercise, you effectively sell your option at zero and buy the stock at $90 per share.
Let's assume one week has passed and the company makes an unexpected announcement. The market does not like the news and the stock sinks to $83. That's unfortunate. If you own the call option, it has lost a lot, maybe almost worthless, and your account might drop by $950. However, if you exercised the option and owned stock prior to the fall, your account value has decreased by $1,600, or the difference between $9,900 and $8,300. This is less than ideal because you lost an additional $650.
When you sell an option, you typically pay a commission . When you exercise an option, you usually pay a fee to exercise and a second commission to buy or sell the shares.. This combination is likely to cost more than simply selling the option, and there is no need to give the broker more money when you gain nothing from the transaction. (However, the costs will vary, and some brokers now offer commission-free trading—so it pays to do the math based on your broker's fee structure).
When you convert a call option into stock by exercising, you now own the shares. You must use cash that will no longer be earning interest to fund the transaction, or borrow cash from your broker and pay interest on the margin loan . In both cases, you are losing money with no offsetting gain. Instead, just hold or sell the option and avoid additional expenses.
Options are subject to automatic exercise at expiration, which means that any contract that is in the money at expiration will be exercised, per rules of the Options Clearing Corporation.
Occasionally a stock pays a big dividend and exercising a call option to capture the dividend may be worthwhile. Or, if you own an option that is deep in the money , you may not be able to sell it at fair value . If bids are too low, however, it may be preferable to exercise the option to buy or sell the stock. Do the math.
There are solid reasons for not exercising an option before and into the expiration date . In fact, unless you want to own a position in the underlying stock, it is often wrong to exercise an option rather than selling it. If the contract is in the money heading into the expiration and you do not want it exercised, then be sure to close it through an offsetting sale or the contract will be automatically exercised per the rules of the Options Clearing Corporation.
Options Clearing Corporation. " OCC By-Laws: General Rights and Obligations of Holders and Writers ," Page 72-73.
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posted on May 5, 2023
Imagine you have a Covered Call right now and the underlying stock is now above your Covered Call strike price.
You’re panicking now because if you get assigned on the Covered Call, you will be Short 100 shares.
The worst part is that you don’t have the necessary capital to meet the margin requirement of Shorting the 100 shares.
And that would result in a margin call.
So what do you do?
And how do you avoid getting the risk of early assignment on your Covered Call?
Let’s assume you already own 100 shares of Amazon (Ticker: AMZN).
Then you sell a Covered Call at the strike price of 135.
If AMZN settles anywhere above $135 at the expiration date of the Covered Call, then your 100 shares will be called away at that price.
That means your 100 shares would be sold at $135.
So when is your Covered Call in danger of getting assigned early?
There’s always the possibility of early assignment when:
In short, the main factor that determines whether you are in danger of getting assigned early is when the extrinsic value is very little.
That’s because when there’s little extrinsic value left in your Covered Call, there’s not much incentive left for the buyer to hold on to the Call Option.
So it’s very important to pay attention to how much extrinsic value is left in your Covered Call.
The good news is that getting assigned early is actually very rare.
To understand a little better why this is so, we need to get into the minds of the Call buyer (the person taking the opposite trade of your Covered Call).
For this, let’s use the same example as we did earlier.
And let’s also assume that for selling the 135 strike price Covered Call you received a premium of $1.50.
Now let’s switch sides and imagine you’re now the Call buyer that just purchased the Call Option for $1.50.
Next, we want to come up with the different scenarios that might happen and see if you would exercise your Call Option early for each of them.
In this scenario, the stock has gone up to $140 and your Call Option has now increased to $6.00:
By exercising your Call Option, you would be buying 100 shares of the underlying stock at $135.
And you will forfeit your extrinsic value of $1.00.
Knowing this, would you exercise your Call Option?
Let’s compare exercising versus selling off your Call Option.
If you exercise and you sell off your shares immediately after exercising, your profits would be:
[($140 – $135) x 100 shares] – $150 for purchasing the Call Option = $350
If you just sold off your Call Option, your profits would be:
($6.00 – $1.50) x 100 shares = $450
As you can see, you would have made more money if you had simply sold off your Call Option.
That’s because the extrinsic value boosted your profits.
But if you exercised your Call Option, you forfeited the extra $100 in profits.
Furthermore, exercising can come with extra fees from some brokers.
So in this scenario, it’s highly unlikely that the Call Buyer would exercise their Call Option, even if it’s ITM.
Now what if the stock went higher to $150 instead?
In this scenario, your Call Option is now worth $15.25:
If you are the Call Buyer, would you exercise your Call Option now?
If you do, you’d be giving up $0.25 in extrinsic value.
That’s $25 in additional profits that you would miss out on by exercising.
I’m pretty sure it’s unlikely that you would exercise because I wouldn’t as well.
While $25 may not be much, it’s still money that we leave on the table by exercising.
So it makes no sense for us to exercise the Call Option and get into a Long stock when there’s still lots of time left before expiration.
If we really wanted to buy the stock, we still can wait till the last few days to expiration before deciding whether to exercise the Long Call or not.
So as you can see, extrinsic value plays a big part in the Call buyer’s decision whether to exercise the Call Option or not.
This scenario is similar to scenario 1, but the difference is that the stock will be paying a dividend.
This is where a Short Call can have dividend risk.
That means that the Call buyer may want to exercise their Option to get into a Long stock position to get the dividends.
So in this scenario, your Call Option’s value is the same as scenario 1 which is $6.00:
However, the underlying stock will be paying a dividend of $0.50.
If you’re the Call buyer, would you exercise your Long Call?
Let’s compare exercising versus selling the Call Option.
If you exercise it, you will forfeit the $1.00 in extrinsic value, but gain the dividend of $0.50.
But if you sell the Call Option, you will forfeit the $0.50 dividend, but profit on the $1.00 in extrinsic value.
So in this scenario, you would gain more by simply selling the Call Option.
Hence, it’s for the Covered Call to get assigned in this scenario.
This scenario is similar to scenario 2 but the stock goes ex-dividend tomorrow with a dividend payout of $0.50.
In this scenario, your Call Option’s value is $15.25:
But there’s a dividend payout of $0.50.
In this scenario, if you were the Call buyer, would you exercise your Long Call?
If we applied the same analysis as in scenario 3, then we would know that it makes sense to exercise the Call Option now because the dividend is greater than the extrinsic value.
That means by exercising the Call Option, you’d gain an additional $0.25 compared to if you hadn’t exercised your Long Call.
So in this scenario, there’s a high likelihood of getting assigned early.
So how do you avoid the risk of early assignment?
By rolling your Covered Call .
When you roll, you’re adding duration to your Covered Call.
And by adding duration, you’re adding extrinsic value.
Remember, extrinsic value is simply time value.
The more days left to expiration, the more extrinsic value there is.
Additionally, when rolling, you have the choice to roll your Covered Call up as well.
That means you roll to a higher strike on top of rolling to a further expiration date.
This way you increase the chances of Covered Call working out.
But what if you’re already assigned?
If you’re already assigned and your shares have been called away, there are 3 things you can do:
At the end of the day, having your shares called away isn’t the end of the world.
You’ve already made a profit (assuming your Covered Call was above your entry price), and you can always find another trade.
And if you think the stock will keep going up in the long term, then just buy back the stock because you would still be in profit if you’re right on your long-term view.
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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.
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:
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.
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.
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:
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Now let's consider what could happen if Bob had sold uncovered calls on ABC stock:
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.
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.
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:
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.
Get new options ideas and up-to-the-minute data on options.
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Nvidia (NASDAQ: NVDA ) has been on an impressive run the previous year, extending well into 2024 and showing no sign of waning, bringing hefty profits to early buyers.
One of these buyers was Former House Speaker Nancy Pelosi , who bought NVDA stock call options on November 21 with a strike price of $120 worth between $1 and $5 million and an expiration date of December 20, 2024.
After a breathtaking run NVDA stock has been on since, adding over 170% to its value, Pelosi earned an estimated $5 million on her call options, approximately 20 times her annual salary.
The former House Speaker shows no signs of being willing to sell, as she keeps adding technology stocks to her portfolio and has recorded no sales so far this year.
Thanks to the great performance of technology stocks this year, Pelosi’s portfolio has recorded a return of 101.6%, with Nvidia, Microsoft (NASDAQ: MSFT ), Apple (NASDAQ: AAPL ), Alphabet (NASDAQ: GOOG) stocks as key contributors to these gains.
This stellar performance means that Pelosi’s portfolio has reached an all-time high.
Not all Pelosi’s trades are winners, at least not for now. She bought call options in Palo Alto Networks (NASDAQ: PANW ) worth between $500,000 and $1 million, and PANW stock has lost 14.77% of its value since the trade.
However, considering that these options expire on January 17, 2025, almost six months from now, there is still plenty of time for PANW stock to join the winners in Pelosi’s portfolio.
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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 their right to buy or sell the underlying security. To ensure fairness in the distribution of American ...
Learn about options exercise and options assignment before taking a position, not afterward. This guide can help you navigate the dynamics of options expiration. 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 ...
Managing an options trade is quite different from that of a stock trade. Essentially, there are 4 things you can do if you own options: hold them, exercise them, roll the contract, or let them expire. If you sell options, you can also be assigned. If you are an active investor trading options with some percentage of your overall investment ...
Options assignment is a process in options ... The seller will still be able to keep the premium received from the sale of the call option. For example, if you own a stock at $100 per share and ...
Examples of Option Assignment 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.
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 ...
An option gives the owner the right but not the obligation to buy or sell stock at a set price. An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice: Short call assignment: The option seller must sell shares of the underlying stock at the strike price. Short put ...
When an investor exercises a call option, the net price paid for the underlying stock on a per share basis is the sum of the call's strike price plus the premium paid for the call. ... (specific to American-style options only). Early assignment risk may be amplified in the event a call writer is short an option during the period the underlying ...
Your first assignment: decoding this important options term before you start trading. ... Consider what happens if XYZ stock increases to $60, the call is exercised by the option holder and the ...
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 ...
The short answer for in-the-money options is (strike price + call price) minus stock price. So if the stock is 53 and you've sold a 50-strike call currently trading at 4 then the time premium is (50 + 4) - 53 = 1. There is 1 point of time premium in the option. The longer answer is that stocks and options have bid prices and ask prices.
Call Option: A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time ...
Option assignment occurs when the owner of an option exercises their right to buy or sell the underlying asset at a specific price on or before expiration. When a call option is assigned, the owner buys shares at the strike price. For example, if XYZ stock is trading for $45 and you sold one XYZ 50 Put, the put buyer has the right to sell 100 ...
The option premium you collect is $10. After three weeks, the stock has jumped to $105, and the short calls are worth $6. You are alerted that you now face a call option assignment. While a small percentage of options contracts are exercised, you are among the few who are chosen to be assigned.
Early exercise happens when the owner of a call or put invokes his or her contractual rights before expiration. Asa result, an option seller will be assigned, shares of stock will change hands, and the result is not always pretty for the seller. (It's important to note that when talking about early exercise and assignment, we're referring ...
An option assignment represents the seller of an option's obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let's explain what that means in more detail. ... if you sell someone a put option, you're promising to buy a stock at a set price any time between when ...
A long call: speculation or planning ahead. A "long call" is a purchased call option with an open right to buy shares. The buyer with the "long call position" paid for the right to buy shares in the underlying stock at the strike price and costs a fraction of the underlying stock price and has upside potential value (if the stock price of the underlying stock increases).
Let's consider an example of a call option on XYZ Corporation with a strike price of 90, an expiration in October, and the stock trading for $99 per share. One call represents the right to buy 100 ...
Generally, writing options have two main benefits and purposes: (1) to capture the option premium time value as the option decays on the way to expiration; and (2) to reduce the cost of putting on a directional long call or put trade. Writing calls and puts and buying calls and puts in combinations allow you to trade many different market ...
Scenario 1: Stock goes to $140. In this scenario, the stock has gone up to $140 and your Call Option has now increased to $6.00: $5.00 in intrinsic value. $1.00 in extrinsic value. By exercising your Call Option, you would be buying 100 shares of the underlying stock at $135.
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 ...
When I sell an option to open, is my only chance of assignment (and being required to fulfill my... The exchanges recently halted trading on a stock where I'm short puts. Am I still obligated to... Options assignment FAQs answered here. Learn about assignment timing, in-the-money calls, and your obligations.
The Long Call. Buying to open a call option affords you the right (but not the obligation) to purchase 100 shares of the underlying stock at the strike price, should the shares rise above that ...
Nvidia (NASDAQ: NVDA) has been on an impressive run the previous year, extending well into 2024 and showing no sign of waning, bringing hefty profits to early buyers.. One of these buyers was Former House Speaker Nancy Pelosi, who bought NVDA stock call options on November 21 with a strike price of $120 worth between $1 and $5 million and an expiration date of December 20, 2024.
x 100 shares). Consider what happens if XYZ stock increases to $60, the call is exercised by the option holder and the investor is assigned. Should the investor not own the stock, they must now acquire and deliver 1,000 shares of XYZ at a price of $50 per share. Given the current stock price of $60, the investor's short stock
The sell-off in GameStop shares intensified in afternoon trading, coinciding with a spike in trading volume in the call options that "Roaring Kitty" owned.
The screenshot also showed he bought 120,000 call options with a $20 strike price. That means that Gill has the right to purchase 12 million shares of GameStop at $20 apiece by a set expiration date.
If an investor was to purchase shares of AMN stock at the current price level of $54.28/share, and then sell-to-open that call contract as a "covered call," they are committing to sell the stock ...
Keith Gill — the meme-stock investor known online as "Roaring Kitty" — appears to have exited his entire options position in GameStop Corp. while adding to his heap of shares.