risk of assignment

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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.

The Risks of Options Assignment

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.

Understanding the basics of assignment

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 assignment: The option seller must buy shares of the underlying stock at the strike price.

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.

When a trader might get assigned

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.

Reducing the risk associated with assignment

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.

Assess the risk

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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What is Options Assignment & How to Avoid It

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.

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.

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.

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?

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.

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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Everything You Need to Know About Options Assignment Risk

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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Understanding the Risks of Early Assignment

March 27, 2024 — 08:33 am EDT

Written by Gavin McMaster for Barchart ->

Early assignment occurs when the owner of an option contract exercises it before the expiration date.

This means that if you're short an options contract (either a call or put), you may be required to fulfill your obligations as the seller of the contract before the expiration date.

If you have sold a put, you could be called upon to buy 100 shares at the strike price.

If you have sold a call, you could be forced to sell 100 shares at the strike price.

Why Does Early Assignment Happen?

Technically, an option can be assigned at any time.

However, it tends to only happen when the option is in-the-money and there is very little time premium left.

Ex-dividend dates can also impact early assignment as some traders will exercise a call option early in order to received the dividend payment.

Let’s look at some examples:

AAPL at $171

The $175 put is trading at $5.70.

The put option is in-the-money with $1.70 of time premium remaining, therefore is unlikely to be assigned early.

The $165 call is trading at $8.00.

The call option in in-the-money with $3.00 of time premium, therefore is unlikely to be assigned early.

The $185 put is trading at $14.00

The put option is in-the-money with $0.00 of time premium remaining, therefore is very likely to be assigned early.

Risks of Early Assignment

The risks associated with early assignment revolve around the obligations on the option seller.

If the option buyer exercises their right to buy or sell the underlying asset, the seller MUST fulfil their obligation.

Being called upon to buy 100 shares could result in a margin call if the investor does not have the required capital.

Early Assignment and Credit Spreads

Let’s assume you sold a 100-95 bull put spread and the stock has dropped to 90 near expiration.

If you are assigned on the 100 put, you can exercise the 95 put.

The two offset and you are left with 0 shares.

Where is gets tricky is if the stock is trading between 95 and 100 near expiration.

Automatic Assignment

If you are an option seller, your option will either be exercised by the buyer or automatically assigned if it is ITM on the expiration date.

If you are an option buyer, your option will not be automatically assigned before expiration.

However, most brokers will automatically assign ITM options on the expiration date.

Early assignment is a risk that all options traders should be aware of and prepared to manage.

As you navigate the dynamic landscape of the financial markets, a mastery of these Greeks opens the door to a strategic and informed approach.

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Options Basics

How a covered call can help, when to use a covered call, what to do at expiration, risks of covered call writing, the bottom line.

Options and Derivatives
Advanced Concepts

Understand the Option Risk With Covered Calls

The covered call is a strategy employed by both new and experienced traders. Because it is a limited risk strategy, it is often used in lieu of writing calls " naked " and, therefore, brokerage firms do not place as many restrictions on the use of this strategy. You will need to be approved for options by your broker before using this strategy, and you will likely need to be specifically approved for covered calls .

Read on as we cover this option strategy and show you how to use it to your advantage.

Key Takeaways

A covered call involves selling an upside call option representing the exact amount of a pre-existing long position in some asset or stock.
The writer of the call earns in the options premium, enhancing returns when the underlying is in a sideways market.
A covered call will, however, limit upside potential and does not protect against the portfolio losing value in a down market.

A call option gives the buyer the right, but not the obligation, to buy the underlying instrument (in this case, a stock) at the strike price on or before the expiry date . For example, if you buy July 40 XYZ calls, you have the right, but not the obligation, to purchase XYZ at $40 per share any time between now and the July expiration.

This type of option can be precious in the event of a significant move above $40. Each option contract you buy is for 100 shares. The amount the trader pays for the option is called the premium .

There are two values to the option, the intrinsic and extrinsic value , or time premium. Using our XYZ example, if the stock is trading at $45, our July 40 calls have $5 of intrinsic value. If the calls are trading at $6, that extra dollar is the time premium. If the stock is trading at $38 and our option is trading at $2, the option only has a time premium and is said to be out of the money (OTM).

Option sellers write the option in exchange for receiving the premium from the option buyer. They are expecting the option to expire worthless and, therefore, keep the premium. For some traders, the disadvantage of writing options naked is the unlimited risk. When you are an option buyer, your risk is limited to the premium you paid for the option. But when you are a seller, you assume a significant risk.

Refer back to our XYZ example. The seller of that option has given the buyer the right to buy XYZ at 40. If the stock goes to 50 and the buyer exercises the option, the option seller will be selling XYZ at $40. If the seller does not own the underlying stock, it will have to be bought on the open market for $50 and then sold at $40. Clearly, the more the stock's price increases, the greater the risk for the seller.

Options sometimes have an unfair reputation as being complex and reserved only for advanced traders, but as you'll learn in Investopedia Academy's Options for Beginners course, that isn't the case. With clear and concise explanations of what options are and how to use them in your favor, you'll quickly discover how options trading can take you where stocks can't.

In the covered call strategy, we will assume the role of the option seller. However, we will not assume unlimited risk because we will already own the underlying stock. This gives rise to the term "covered" call because you are covered against unlimited losses in the event that the option goes in the money and is exercised.

The covered call strategy requires two steps. First, you already own the stock. It needn't be in 100 share blocks, but it will need to be at least 100 shares. You will then sell, or write, one call option for each multiple of 100 shares: 100 shares = 1 call or 200 shares = 2 calls.

When using the covered call strategy, you have slightly different risk considerations than you do if you own the stock outright. You do get to keep the premium you receive when you sell the option, but if the stock goes above the strike price, you have capped the amount you can make.

There are many reasons traders employ covered calls. The most common is to produce income on a stock that is already in your portfolio. You may believe that in the current market environment, the stock's price is not likely to appreciate, or it might even drop.

Even with knowing this, you may still want to hold onto the stock, possibly as a long-term hold, for dividend or tax reasons. As a result, you may decide to write covered calls against the position.

Alternatively, many traders look for opportunities on options they feel are overvalued and will offer a good return. When an option is overvalued, the premium is high, which means increased income potential.

To enter a covered call position on a stock that you do not own, you should simultaneously buy the stock (or already own it) and sell the call. Remember when doing this that the stock may go down in value. While the option risk is limited by owning the stock, there is still risk in owning the stock directly.

Eventually, we will reach expiration day. If the option is still out of the money, likely, it will just expire worthless and not be exercised. In this case, you don't need to do anything. You could then write another option against your stock if you wish.

If the option is in the money, expect the option to be exercised. Depending on your brokerage firm, everything is usually automatic when the stock is called away . Be aware of what fees will be charged in this situation, as each broker will be different. You will need to be aware of this so that you can plan appropriately when determining whether writing a given covered call will be profitable.

Let's look at a brief example. Suppose that you buy 100 shares of XYZ at $38 and sell the July 40 calls for $1. In this case, you would bring in $100 in premiums for the option you sold. This would make your cost basis on the stock $37 ($38 paid per share - $1 for the option premium received).

If the July expiration arrives and the stock is trading at or below $40 per share, it is very likely that the option will expire worthless, and you will keep the premium. You can then continue to hold the stock and write another option if you choose.

If, however, the stock is trading at $41, you can expect the stock to be called away. You will be selling it at $40, which is the option's strike price. But remember, you brought in $1 in premium for the option, so your profit on the trade will be $3 (bought the stock for $38, received $1 for the option, stock called away at $40).

Likewise, if you had bought the stock and not sold the option, your profit in this example would be the same $3 (bought at $38, sold at $41).

If the stock is higher than $41, the trader who held the stock and did not write the 40 call would be gaining more, whereas, for the trader who wrote the 40 covered call, the profits would be capped.

The risks of covered call writing have already been briefly touched upon. The main risk is missing out on stock appreciation in exchange for the premium. If a stock skyrockets because a call was written, the writer only benefits from the stock appreciation up to the strike price, but no higher. In strong upward moves, it would have been favorable to hold the stock and not write the call.

While a covered call is often considered a low-risk options strategy, that isn't necessarily true. While the risk on the option is capped because the writer owns shares, those shares can still drop, causing a significant loss. However, the premium income helps slightly offset that loss.

This brings up the third potential downfall. Writing the option is one more thing to monitor. It makes a stock trade slightly more complicated and involves more transactions and more commissions.

Can You Lose Money on a Covered Call?

Yes, you can lose money on a covered call. If the stock price drops below the breakeven point in a covered call, you will lose money.

Is a Covered Call Bullish or Bearish?

A covered call is a neutral to bullish trade. The trader will sell either one out-of-the-money (OTM) or at-the-money (ATM) call option, collecting the premium, and then waiting on whether the call expires or is executed.

Why Are Covered Calls Bad?

Covered calls are not necessarily bad. It is recommended not to write covered calls for stocks with high growth potential. The reason is that the upside gain will be missed because you'll be required to sell at the strike price.

The covered call strategy works best on stocks where you do not expect a lot of upside or downside. Essentially, you want your stock to stay consistent as you collect the premiums and lower your average cost every month. Remember to account for trading costs in your calculations and possible scenarios.

Like any strategy, covered call writing has advantages and disadvantages. If used with the right stock, covered calls can be a great way to reduce your average cost or generate income.

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Long calendar spread with calls

Potential goals.

To profit from neutral stock price action near the strike price of the calendar spread with limited risk in either direction.
To profit from a directional stock price move to the strike price of the calendar spread with limited risk if the market goes in the other direction.

Explanation

A long calendar spread with calls is created by buying one “longer-term” call and selling one “shorter-term” call with the same strike price. In the example a two-month (56 days to expiration) 100 Call is purchased and a one-month (28 days to expiration) 100 Call is sold. This strategy is established for a net debit (net cost), and both the profit potential and risk are limited. The maximum profit is realized if the stock price is equal to the strike price of the calls on the expiration date of the short call, and the maximum risk is realized if the stock price moves sharply away from the strike price.

Example of long calendar spread with calls

Maximum profit.

The maximum profit is realized if the stock price equals the strike price of the calls on the expiration date of the short call. This is the point of maximum profit, because the long call has maximum time value when the stock price equals the strike price. Also, since the short call expires worthless when the stock price equals the strike price at expiration, the difference in price between the two calls is at its greatest.

It is impossible to know for sure what the maximum profit will be, because the maximum profit depends of the price of long call which can vary based on the level of volatility.

Maximum risk

The maximum risk of a long calendar spread with calls is equal to the cost of the spread including commissions. If the stock price moves sharply away from the strike price, then the difference between the two calls approaches zero and the full amount paid for the spread is lost. For example, if the stock price falls sharply, then the price of both calls approach zero for a net difference of zero. If the stock price rallies sharply so that both calls are deep in the money, then the prices of both calls approach parity for a net difference of zero.

Breakeven stock price at expiration of the short call

Conceptually, there are two breakeven points, one above the strike price of the calendar spread and one below. Also, conceptually, the breakeven points are the stock prices on the expiration date of the short call at which the time value of the long call equals the original price of the calendar spread. However, since the time value of the long call depends on the level of volatility, it is impossible to know for sure what the breakeven stock prices will be.

Profit/Loss diagram and table: Long calendar spread with calls

*Profit or loss of the long call is based on its estimated value on the expiration date of the short call. This value was calculated using a standard Black-Scholes options pricing formula with the following assumptions: 28 days to expiration, volatility of 30%, interest rate of 1% and no dividend.

Appropriate market forecast

A long calendar spread with calls realizes its maximum profit if the stock price equals the strike price on the expiration date of the short call. The forecast, therefore, can either be “neutral,” “modestly bullish,” or “modestly bearish,” depending on the relationship of the stock price to the strike price when the position is established.

If the stock price is at or near the strike price when the position is established, then the forecast must be for unchanged, or neutral, price action.

If the stock price is below the strike price when the position is established, then the forecast must be for the stock price to rise to the strike price at expiration (modestly bullish).

If the stock price is above the strike price when the position is established, then the forecast must be for the stock price to fall to the strike price at expiration (modestly bearish).

Strategy discussion

A long calendar spread with calls is the strategy of choice when the forecast is for stock price action near the strike price of the spread, because the strategy profits from time decay. While the “low” net cost to establish the strategy and the potentially “high” percentage profits are viewed as attractive features by some traders, calendar spreads require the stock price to be “near” the strike price as expiration approaches in order to realize a profit. Consequently, one cannot overlook the possibility of “high” percentage losses if the stock price moves away from the strike price. Long calendar spreads with calls, therefore, are suitable only for experienced traders who have the necessary patience and trading discipline. Patience is required, because this strategy profits from time decay, and stock price action can be unsettling as it rises and falls around the strike price as expiration approaches. Trading discipline is required, because “small” changes in stock price can have a high percentage impact on the price of a calendar spread. Traders must, therefore, be disciplined in taking partial profits if possible and also in taking “small” losses before the losses become “big.”

Impact of stock price change

“Delta” estimates how much a position will change in price as the stock price changes. Long calls have positive deltas, and short calls have negative deltas. The net delta of a long calendar spread with calls is usually close to zero, but, as expiration approaches, it varies from −0.50 to +0.50 depending on the relationship of the stock price to the strike price of the spread.

With approximately 20 days to expiration of the short call, the net delta varies from approximately +0.10 with the stock price 5% below the strike price to −0.10 with the stock price 5% above the strike price.

With approximately 10 days to expiration of the short call, the net delta varies from approximately +0.20 with the stock price 5% below the strike price to −0.20 with the stock price 5% above the strike price.

When the stock price is slightly below the strike price as expiration approaches, the position delta approaches +0.50, because the delta of the long call is approximately +0.50 and the delta of the short call approaches 0.00.

When the stock price is slightly above the strike price as expiration approaches, the position delta approaches −0.50, because the delta of the long call is approximately +0.50 and the delta of the short call approaches −1.00.

The position delta approaches 0.00 if the calls are deep in the money (stock price above strike price) or far out of the money (stock price below strike price). If the calls are deep in the money, then the delta of the long call approaches +1.00 and the delta of the short call approaches −1.00 for a net spread delta of 0.00. If the calls are out of the money, then the deltas of both calls approach 0.00.

Impact of change in volatility

Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant. Long options, therefore, rise in price and make money when volatility rises, and short options rise in price and lose money when volatility rises. When volatility falls, the opposite happens; long options lose money and short options make money. “Vega” is a measure of how much changing volatility affects the net price of a position.

Since a long calendar spread with calls has one short call with less time to expiration and one long call with the same strike price and more time, the impact of changing volatility is slightly positive, but very close to zero. The net vega is slightly positive, because the vega of the long call is slightly greater than the vega of the short call. As expiration approaches, the net vega of the spread approaches the vega of the long call, because the vega of the short call approaches zero.

Impact of time

The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion. “Theta” is a measure of how much time erosion affects the net price of a position. Long option positions have negative theta, which means they lose money from time erosion, if other factors remain constant; and short options have positive theta, which means they make money from time erosion.

Since a long calendar spread with calls has one short call with less time to expiration and one long call with the same strike price and more time, the impact of time erosion is positive if the stock price is near the strike price of the calls. In the language of options, this is a “net positive theta.” Furthermore, the positive impact of time erosion increases as expiration approaches, because the value of the short-term short at-the-money call decays at an increasing rate.

If the stock price rises above or falls below the strike price of the calendar spread, however, the impact of time erosion becomes negative. In either of these cases, the time value of the shorter-term short call approaches zero, but the time value of the longer-term long call remains positive and decreases with passing time.

Risk of early assignment

Stock options in the United States can be exercised on any business day, and holders of short stock option positions have no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options.

While the long call in long calendar spread with calls has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.

If assignment is deemed likely and if a short stock position is not wanted, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be eliminated in two ways. First, the entire spread can be closed by selling the long call to close and buying the short call to close. Alternatively, the short call can be purchased to close and the long call can be kept open.

If early assignment of the short call does occur, stock is sold, and a short stock position is created. If a short stock position is not wanted, there are two choices. First, the short stock position can be closed by exercising the long call. Second, shares can be purchased in the marketplace and the long call can be left open. Generally, if there is time value in the long call, then it is preferable to purchase shares rather than to exercise the long call. It is preferable to purchase shares in this case, because the time value will be lost if the call is exercised.

Note, also, that whichever method is used to close the short stock position, the date of the stock purchase will be one day later than the date of the short sale. This difference will result in additional fees, including interest charges and commissions. Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position.

Potential position created at expiration of the short call

If the short call is assigned, then stock is sold and a short stock position is created. In a long calendar spread with calls, the result is a two-part position consisting of short stock and long call. This position has limited risk on the upside and substantial profit potential on the downside. If a trader has a bearish forecast, then this position can be maintained in hopes that the forecast will be realized and a profit earned. If the short stock position is not wanted, then the position must be closed either by exercising the call or by purchasing stock and selling the call (see Risk of Early Assignment above).

Other considerations

Long calendar spreads with calls are frequently compared to short straddles and short strangles, because all three strategies profit from “low volatility” in the underlying stock. The differences between the three strategies are the initial investment (or margin requirement), the risk and the profit potential. In dollar terms, short straddles and short strangles require much more capital to establish, have unlimited risk and have a larger, albeit limited, profit potential. Long calendar spreads, in contrast, require less capital, have limited risk and have a smaller limited profit potential. Traders who are not suited to the unlimited risk of short straddles or strangles might consider long calendar spreads as a limited-risk alternative to profit from a neutral forecast. One should not forget, however, that the risk of a long calendar spread is still 100% of the capital committed. The decision to trade any strategy involves choosing an amount of capital that will be placed at risk and potentially lost if the market forecast is not realized. In this regard, choosing a long calendar spread is similar to choosing any strategy.

The long calendar spread with calls is also known by two other names, a “long time spread” and a “long horizontal spread.” “Long” in the strategy name implies that the strategy is established for a net debit, or net cost. The terms “time” and “horizontal” describe the relationship between the expiration dates. “Time” implies that the options expire at different times, or on different dates. The term “horizontal” originated when options prices were listed in newspapers in a tabular format. Strike prices were listed vertically, and expirations were listed horizontally. Therefore a “horizontal spread” involved options in the same row of the table; they had the same strike price but they had different expiration dates.

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Trading Education Guides Options Trading

Stock Assignment With Options

By Lucien Bechard
Updated May 12, 2023

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Are you at risk for stock assignment with options? That’s a question new options traders focus on. The thought of being assigned sounds scary, but it’s not. While rare, it’s important to be aware of how the assignment process works. You have no control on when options assignment takes place. If you don’t have the funds then your broker will automatically close the trade for you. If you are assigned shares of the stock and you don’t want them, then you can just sell them. Nothing to worry about!

Table of Contents

When Will I Get Assigned

Selling options and your risk of stock assignment, are you at risk for stock assignment when selling a naked call, two key things to be aware of, call/put spread, what are the two ways to prevent assignment, key takeaways, how trade options smarter, what is stock assignment with options.

When I talk to traders, especially those interested in options trading , one of their biggest fears is getting assigned stock. To refresh your memory, when you buy/sell an option, you control 100 shares of that option’s stock. Even more unsettling is the options traders who never think about assignment as a possibility until it happens to them. So are you at risk for stock assignment? It’s like a pop quiz at school – generally unexpected and typically jarring if you haven’t factored in the assignment.

Even more so if you’re running a multi-leg strategy like long or short spreads, and usually it’s not a good feeling!

Well, I’m hoping to help you put some of that anxiety to rest with this post. Let’s start with the 3 most common questions we get asked here at the Bullish Bears stock trading service :

In what situations would I get assigned stock?
How do I prevent being assigned stock?
If I am assigned, what do I need to do?

Are you at risk for stock assignment? As an options seller, you have no control over an assignment.

First things first, let’s tackle the most obvious question, “when will I get assigned share of stock?”. In our experience, the easiest way to be assigned stock is if you short (sell) an option that expires in the money.

On the flip side, when you buy an option -either a call or a put, you cannot be assigned stock unless you decide to exercise your option(s).

As the purchaser of an option contract, you are in control. And by control I mean you, and you alone will always have the choice to exercise the option .

Do you see how I wrote a choice? Yes, you have the choice but not the obligation to do so.

Let’s say you bought a Facebook (ticker symbol FB) option a few weeks ago and it is set to expire today. Right now, since the option is in the money – there is never a risk of assignment. Because of this, you have two choices, you can:

Let the option expire in the money to collect the profit, or…
Decide to exercise the option and collect the 100 shares of stock

That said, let’s circle back to the most common way to get assigned stock – selling options. Make sure to take our options strategies course to learn how to safely sell options.

Are you at risk for stock assignment? Put simply, you will be assigned stock if you sell an option that is in the money at expiration.

It boils down to this: as the options seller; you have no control over an assignment, or when it could happen. Typically the risk of assignment increases as the expiration date gets closer. With that said, an assignment can still occur at any time.

Let’s say you sold an AAPL ( ticker symbol for Apple) option a couple of weeks ago. Your option is set to expire today and its in the money.

If this happens, you are automatically assigned 100 shares of stock. So if you sold a call, you would be assigned, and if you sold a put, you would be assigned.

In both cases, it’s 100 shares of stock for each one contract. Check out our trade room where we talk options.

When you buy a naked call, you have control over what you do with the option. But, when you’re the seller of a naked call option, you have no control over assignment if your call expires in the money.

And, it only has to be $.01 in the money for the assignment to happen. If you find yourself in this situation, you automatically will be forced to sell 100 shares of stock to the person who bought your option.

Hypothetically, let’s say you sell a FB call option to your friend Amanda at a strike price of $525. Amanda then decides to exercise her option because it’s in the money.

You then have to turn around and sell her 100 FB shares for each option contract at $525/share. Even if you do not own FB stock, you will still have to sell Amanda the shares. Now you find a situation in which you are short 100 shares of FB stock.

Assignment and commission fees. If you do not close the trade out or roll it before expiration and have to sell the shares, you’ll have fees to pay.
Dividends. Be wary when a company has upcoming dividends because this will increase your assignment risk. You need to be on high alert if the extrinsic value on an ITM short call is LESS than the dividend amount. And why? Well, it would only make sense that the ITM call owner would want to exercise their option in order to benefit from the dividend associated with owning the stock

Once again, similar to selling a naked call, when you sell a naked put, if your option expires in the money at expiration, you do not have control over an assignment.

What does this mean for you? You will be assigned 100 shares of stock at the options strike price if your short put is in the money at expiration. And don’t forget the assignment fee and commissions.

Like the example above with your friend Amanda, if you sell her a naked put that is expiring in the money, she has options.

If Amanda chooses to exercise those options, you need to buy 100 shares of FB stock for each of her option contracts, at $525 a share – even if you don’t have the money in your account!

Our stock watch lists have options trades on there with alert setups.

Assignment risk happens when your short strike expires in the money.

If you sell a put or call spread , the assignment risk stems from your short strike expiring in the money at expiration. If this scenario happens, you will be forced to sell 100 shares to the buyer for each option contract they purchased.

Likewise, if you sell a put spread you will be assigned 100 shares of stock per contract if the short strike is in the money at expiration.

On the flip side, however, if both strikes expire in the money, they will cancel each other out. Even though the short strike is assigned, you can turn around and exercise the long strike.

Are you at risk for stock assignment? You don’t want to be hurt financially if the assignment happens. So it’s wise to avoid this situation to the best of your ability. In my opinion, you have two avenues to avoid assignment:

You close the trade before it expires which means you take any profits or losses
You can simply roll the trade to extend the days to expiration. What this does is give you more time for the trade to be profitable.

Despite your best efforts to avoid unwanted assignment, it can occasionally still happen. So if you find yourself in this situation, here’s what to do…

Don’t panic.

There are two things you can do if you sold an option that has expired in the money.

You can hold the long or short stock or buy/sell the shares back for a profit or loss. In this scenario, you will need the money in your account to pay for the shares.
If you were assigned shares and didn’t have the money to cover the shares you were assigned (a.k.a. a margin call), immediately buy/sell back the shares. Before the end of the trading day, your broker will do it for you if you don’t.
As an options seller, you have no control over the assignment or its timing
The options buyer controls when an assignment happens.
If you do not have enough money in your account to cover either your long or short stock position, be wise and immediately close your position. Your broker will do it for you if you fail to.
Spreads are one way to have protection against being assigned, but, BOTH legs need to be in the money if you are to be protected.
Additional assignment risk happens if you have a short call position that is in the money at the time of the dividend.

The best defense against early assignment is a good offence; so be prepared and factor it into your thinking early.

Otherwise, it can cause you to make defensive, in-the-moment decisions that are less than logical. This is because the assignment can happen pretty easily if you are not monitoring your positions regularly. Sometimes it can even happen if you are.

If you’re anything like me, you get busy during the day and don’t get a chance to check your positions. Worse yet, you’re trading options on an illiquid underlying.

You might find yourself in a position without any buyers/sellers available so you cannot close your position. So my point is this; monitor your positions closely and watch liquidity closely.

If you need more help, take our options trading course .

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Options Assignment Risk
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What is the options assignment risk?

Trading options is a very lucrative way to make money in the stock market. Using the same methods that I teach in my trading PowerX Trading Strategy, I was able to turn a 25k account into a 45k account in 2 months!

If you’d like to learn more about this strategy, you can get the book for FREE! Just pay shipping and handling. Click HERE

25K to 45K in 2 months? This sounds too good to be true… and I would like to tell you that it is NOT too good to be true, but there are some inherent risks associated with options trading.

ONE of the biggest risks, and possibly the MOST common risk associated with trading options are options assignment risks.

As you may know by now, options contracts expire. When you purchase an options contract you have the right to exercise the contract, and buy or sell the underlying asset for the agreed-upon price. If you allow the contract to expire in the money (ITM) you run the risk of being assigned the 100 shares of the underlying stock.

This is known as an options assignment risk.

Specific Examples of Options With Different Expiration Dates

In the example we’re going to discuss today, we’re going to look at how options expiration or the length of time to expiration can affect your options assignment risk.

To illustrate the relationship between options assignment risk and options expiration, we’re going to look at trading a 315 call options contract on Apple ( AAPL) with 7 days left until expiration. The current strike price of AAPL is 318.

This options contract is currently trading for $6 , but only has $3 of intrinsic value. If you were to exercise the option, you would be able to purchase the AAPL stock for $315, and you would capture $3 of profit. If you sell the option, you’ll earn twice that, because the options contract is selling for $6 .

The difference in the cost of the intrinsic value ($3) of the option and actual value ($6) of the option has to do with time decay. As the option contract gets closer to its expiration date, time decay erodes the value of the options contract.

In our next example, we’ll look at trading the same options contract with a $315 strike price, but with 0 days to expiration.

As you can see in this image, the same contract with zero days until expiration has only $3 of value. Time decay, otherwise known as theta, has slowly eaten away the value of the contract so that now there is only the intrinsic value of the option left.

On a side note: Selling Theta is a very powerful way to make money while trading. I have taught thousands of traders to use Theta, or the time decay of options, to produce income while trading options. If you’d like to learn more about the Theta Kings class, click HERE

Options Expiration

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 contract is in the money at expiration, you must either buy back the contract BEFORE expiration, or risk options assignment.

In this next example, we will look at selling a put contract on Herts (HTZ).

The current price strike price of HTZ is $2.87.

If you were to SELL a $3 put option on HTZ, the option would have the intrinsic value of .13 cents! Meaning if you chose to exercise the option, you would only make .13 cents per share.

If we look at this option with 1 week out until expiration we can see that it has more value because time decay has not eroded the value.

In the image of the HTZ option chain above we can see that the $3 dollar put option with one week until expiration has .85 cents of value.

To Exercise or to Sell, That Is The Question

As you can see, there’s WAY more profit when selling a contract vs exercising a contract when there is time to expiration.

In summary, it’s very unlikely that someone will exercise an options contract when there is time remaining before expiration. There is usually more profitability when there is less time decay or Theta decay in the contract.

When should you worry about options assignment risk?

Some traders are under the impression that IF the stock price moves below or above your strike price (depending on whether you sold a put or call) you risk assignment immediately. This is NOT true. You risk assignment the closer your contract gets to expiration.

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What type of trader are you, a beginner’s guide to buying vs selling options, how to sell put options: margin requirements explained, leave a reply.

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What Is Early Assignment Risk In Options Trading? Who Is Affected & How To Mitigate It?

In options trading (American style), the options contract owner (or buyer) has the right to exercise the options contract anytime between the start of the contract and the expiration date. An early assignment means the options contract buyer chooses to exercise the contract before the expiration date.

However, it is usually rare as there is a time value as part of the premium that he has paid for when the options contract was established. An early assignment would mean that he would forgo some of the premium he had paid when the contract was established.

Who Is At Risk Of Early Assignment?

However, there are a few scenarios where early assignment (exercise) of a contract may happen and it is important for the options seller to take note of them, especially if he has no intention to buy ( PUT contract) or sell ( CALL contract) his shares. The risk applies to the options contract sellers because only the options buyer has the right to exercise the contract anytime before the expiration date.

The PUT options seller may just want to collect a premium through selling a PUT options contract and has no intention of owning the shares. Thus, he would hope that the PUT options contract that he sold would expire worthless instead of expiring In-The-Money (ITM) .

I am in this group when I use the SOP strategy to collect monthly income through selling OTM PUT options contracts: My Options Trading Strategy For 2023 | Introducing SOP Options Trading Strategy

In another scenario, the PUT seller may not have enough capital to purchase the shares, which means it is not a cash-secured PUT , where the seller has set aside capital to purchase the shares if he gets assigned the contract.

This is possible with a margins account: How I Use My Margins Account To Earn Extra Income (Safely)? | How My Margins Account Help In My Selling PUT Strategy?

In another group of CALL options sellers who are at risk, the seller may not wish to sell away his shares at the strike price, which he could have set much lower than his breakeven pricing. It may also be a naked short CALL, whereby the seller may not have the shares to honor the contract if it gets assigned early.

What Are The Possible Scenarios Of Early Assignment?

The risk of assignment for the CALL options contract sellers increases when the underlying stock pays dividends and when it is nearing the ex-dividend date. The CALL options contract buyers are not entitled to dividend payments, so if they wish to receive the dividend, they will have to exercise the CALL options and become stock owners.

If the upcoming dividend amount is larger than the time value remaining in the call’s price, it makes sense to exercise the option contract. But the CALL buyers will have to exercise the options contract prior to the ex-dividend date.

So for CALL options sellers who do not wish to get assigned, always be mindful if you are selling a stock that is paying dividends, and do take note if the ex-dividend date is close to the expiration date, the call options contract is in-the-money, and the dividend is relatively large. All these scenarios will significantly increase the chance of early assignment.

For PUT options contract sellers , the risk will increase in the scenario whereby the buyer is in an advantageous position and wishes to sell away his shares to collect the cash. However, he must factor the time value into the equation, before deciding if it is indeed a wise decision to exercise the PUT options early.

For PUT options contract buyers, it is usually a good idea to sell the put first and then immediately sell the stock. That way, he can capture the time value for the put along with the value of the stock. However, as expiration approaches and time value becomes negligible, early exercise seems plausible. That’s because by exercising the PUT contract, the PUT buyer can accomplish his aim of selling the shares and collecting the capital, all in one simple transaction without any further hassles or extra commission charges.

Therefore, for PUT options contract sellers, remember that the less time value there is in the price of the option as the expiration date nears, the higher the risk of an early assignment. So keep a close eye on the time value left in your short puts and have a plan in place in case you’re assigned early.

For PUT options contract sellers, an approaching ex-dividend date can be a deterrent against early exercise for PUT. By an early assignment, the options contract buyer will receive the cash now. However, this will create a short sale of stock if the PUT owner wasn’t owning the stock in the first place. So exercising the PUT options the day before an ex-dividend date means the PUT buyer will have to pay the dividend. So, this means PUT sellers may have a lower chance of being assigned early, but only until the ex-dividend date has passed.

Concluding Thoughts

To summarise, an options contract buyer (owner) will exercise early if certain conditions are met to ensure that what he receives is more than enough to cover the remaining time value in the contract (which he has already paid upfront when the contract was established).

For CALL buyers, it would be the dividends paid out, that are greater than the remaining time value. For PUT buyers, it would be the increase in premium (due to the underlying share price moving in the intended direction, i.e. stock price collapsing) being greater than the remaining time value in the contract.

In a nutshell, as the difference between the intrinsic value (the difference between the current price of a stock and the strike price of the option) and the extrinsic value (the difference between the market price of an option and its intrinsic value) increases, the risk of early assignment also increases. So, to manage the risk of early assignment, the options seller must be mindful of the increasing intrinsic value and the decreasing extrinsic value.

To mitigate against early assignment, the options contract seller can prolong the contract duration by rolling it to a later date and collecting more upfront premiums in the process. This also increases the extrinsic value of the options contract. Alternatively, he can also avoid selling CALL options on stocks that pay dividends or with an expiration date close to the ex-dividend date.

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Understanding the Risks of Early Assignment

Early assignment occurs when the owner of an option contract exercises it before the expiration date.

This means that if you're short an options contract (either a call or put), you may be required to fulfill your obligations as the seller of the contract before the expiration date.

If you have sold a put, you could be called upon to buy 100 shares at the strike price.

If you have sold a call, you could be forced to sell 100 shares at the strike price.

Why Does Early Assignment Happen?

Technically, an option can be assigned at any time.

However, it tends to only happen when the option is in-the-money and there is very little time premium left.

Ex-dividend dates can also impact early assignment as some traders will exercise a call option early in order to received the dividend payment.

Let’s look at some examples:

AAPL at $171

The $175 put is trading at $5.70.

The put option is in-the-money with $1.70 of time premium remaining, therefore is unlikely to be assigned early.

The $165 call is trading at $8.00.

The call option in in-the-money with $3.00 of time premium, therefore is unlikely to be assigned early.

The $185 put is trading at $14.00

The put option is in-the-money with $0.00 of time premium remaining, therefore is very likely to be assigned early.

Risks of Early Assignment

The risks associated with early assignment revolve around the obligations on the option seller.

If the option buyer exercises their right to buy or sell the underlying asset, the seller MUST fulfil their obligation.

Being called upon to buy 100 shares could result in a margin call if the investor does not have the required capital.

Early Assignment and Credit Spreads

Let’s assume you sold a 100-95 bull put spread and the stock has dropped to 90 near expiration.

If you are assigned on the 100 put, you can exercise the 95 put.

The two offset and you are left with 0 shares.

Where is gets tricky is if the stock is trading between 95 and 100 near expiration.

Automatic Assignment

If you are an option seller, your option will either be exercised by the buyer or automatically assigned if it is ITM on the expiration date.

If you are an option buyer, your option will not be automatically assigned before expiration.

However, most brokers will automatically assign ITM options on the expiration date.

Early assignment is a risk that all options traders should be aware of and prepared to manage.

As you navigate the dynamic landscape of the financial markets, a mastery of these Greeks opens the door to a strategic and informed approach.

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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10 Common Mistakes of Options Trading

Time-frame awareness is critical in appropriately defining the risk-reward in a trade.

While we love to focus on expanding our knowledge and terminology around trading stocks, it's also important to dive into potential mistakes an investor could make while working within the market. Below, we have a list of 10 trading mistakes per Schaeffer's Senior V.P. of Research Todd Salamone, which will help develop more clarity on what it could mean for an options trader if they fall victim to a hectic market.

1. Misallocation of Capital

When buying options, there are many opportunities to make gains of 100%, 200% and even more in short time periods, and such gains can be achieved on relatively small moves in the underlying. But depending on the types of options that you are buying, there are also chances that you can lose 100% of the dollars invested in a particular trade. So, given the risk of a total loss on a trade, but also the strong potential to double, triple, or even quadruple your money, the dollars you commit to trading options should be a significantly less dollar commitment than what you trade with stocks. By doing this, you have the potential to achieve the same profits as a stock trader, but with significantly less money at risk.

2. Thinking a High Win-rate Means Profit

Win rate, average win, and average loss are the key factors in determining bottom-line profitability when buying options. Because you pay a time premium that decays at a non-linear rate AND you have a defined period for your expected move to happen -- defined by the expiration date – option buyers should expect a below 50% win rate. Therefore, in order to achieve profits, the average win must be higher than the average loss. In other words, it is important to focus on letting profits run and cutting losses short when possible. Those with high win rates trading options tend to take profits quickly, resulting in puny winners; and they tend to hold on to losing trades, hoping they will turn into winners - a recipe for disaster. A 60% win rate with a 20% average win and 60% average loss results in a 12% loss, assuming equal dollars in each trade. Flip those numbers (40% win rate, 60% average win, 20% average loss) and a 12% profit occurs.

3. Not Diversifying Your Portfolio

In options trading, this can mean many things, including diversifying strategies to ensure you have exposure to the unknowns and different market environments. For example, strategies such as straddles allow one to profit from explosive moves in either direction; while credit spreads and other premium selling strategies allow on to profit in calm, directionless environments. But even if option-buying is your only strategy, diversity within an options portfolio implies exposure to both calls and puts, different time frames with respect to time played until expiration and more than one set up for both call and put trades. For example, calls set ups might include a momentum-based, breakout strategy and also a strategy that looks for oversold situation in which the underlying is pulling back to support.

4. Lack of Discipline

Lack of discipline can mean a number of things. Broadly speaking, whether you are an inexperienced trader that has learned from a successful trader, or an experienced trader who knows what it takes to make money, a lack of discipline means taking short cuts and consistently ignoring know rules and guidelines to achieve bottom-line success. For example, even though a key metric to successful option buying is achieving an average win that is much higher than your average loss, a trader with a lack of discipline will be quick to take profits and be negligible about cutting losses. Or, one will ignore money management principles, such as plowing significantly more money into a trade right after experiencing a losing trade because he wants to make his money back quicker or think he is “due” for a win, even though the results of previous trades are totally independent of the results of the next trade.

5. Trading Without an Edge

What is it that you know that few, if any, know? With options, this can pertain to a signal that gives you a clue on direction for a particular underlying that the masses are unaware, or something about its options – its open interest configuration or the pricing of the options - that make the risk-reward attractive now versus other times. When trading, you are embarking on a journey with many others that are trying to accomplish the same thing, and some are taking a view that directly opposes you. Like anything in which competition is involved, those with an edge have a leg up.

6. Front-running Drivers

It is natural for anyone speculating in the market to want action all the time. But beware, especially when buying options, you have a defined time in which the stock has to move and in most cases, there is a time premium embedded in the option’s price that decays at a non-linear rate over time. As such, it is not a good idea to front-run drivers, as these factors work against you, and thus more precision is needed than a stock buying strategy. Remember, there is a big difference between buying a stock and buying an option. While options give you the advantage of reduced dollars at risk and leverage relative to buying an equity, there are risks you take on in exchange for these benefits. The smart option buyer recognizes these risks and works to reduce them through patience and an understanding of the “ Greeks ,” or the various factors that determine an options price.

7. Buying What’s Cheapest Without Understanding the Greeks

Some are drawn to options because they are cheap. You can buy a 10 cent option, which typically controls 100 shares of the underlying equity or exchange-traded fund, for $10 (0.10 x 100 shares). And this might look “cheap” relative to a $4.00 option, which costs you $400 ($4.00 x 100). The 10 cents option could be on the ones that deliver 1,000 percent returns, but the chances are slim. You have to look at the delta, which is an approximation of the option being worth anything at expiration, since the delta is a measure of the sensitivity to the underlying’s price. It is the nickel and dime options that usually have a 90% or more probability of being worthless at expiration. If such options make up the core of your option-buying strategy, you run a high risk of losing your entire trading capital devoted to options. In other words, cheaper is not necessarily better.

8. Poor Options Selection

There are a myriad of routes available when trading options, including the many strike prices available and the expiration played. The upside of this is the flexibility and ability to fit the time frame with the indicator(s) you are using, the downside is that this can be intimidating and overwhelming to the inexperienced options trader. One focus when buying options should be tied to your risk tolerance, as some options can produce higher returns than others, but with that comes the higher probability of losing your entire investment. This is often when strike selection becomes important when you lock into a specific time frame. Speaking of time frame, the expiration you select is also important, and as such, aligning your time frame with your indicators is critical when trading options.

9. Trading Illiquid Options

If you are an individual trader, beware of the difference between the bid price (the price at which you can sell an option) and the ask price (the price at which you can buy the option). This is known as the spread. The more liquid options will have narrower bid and ask price, such as a nickel or dime difference. The most liquid options will have a penny difference on some contracts. The average daily volume of a contract and its open interest can also be indicators of liquidity, although sometimes the open interest may be attributable to only one day or two days of trading during the contract’s life, depending on the situation.

If you are consistently trading illiquid contracts with wider spreads -- selling the bid and buying the offer -- you are incurring significant slippage. In such situations, work the order by placing limit orders between the bid and ask to see at what point they’ll fill the order. If they don’t fill it, cancel the order and try again. Keep in mind that in the more liquid situations where there is decent volume and a narrow spread, there is a chance that you can buy an option at the bid, or sell at its ask. Over time, this can give you an advantage.

10. Focusing on Singular Time Frames

This applies to reaching charts. Sometimes traders get fixated on intraday or daily charts, and have zero perspective on resistance or support levels or longer-term moving averages that may lie just overhead or below that could impact the price action. So, even if you are playing a shorter-dated option, such longer-term levels could impact the short-term price action. As an option trader, such awareness is critical in appropriately defining the risk-reward in a trade. If such a situation arises, it may cause you to pass on the trade, or decide to play an option with a longer time til expiration to give it time to break through the support or resistance that was not visible on a shorter-term chart.

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Option Assignment Risk Explained
EP. 32: ASSIGNMENT RISK IN OPTIONS TRADING (HOW IT WORKS & HOW TO AVOID IT)
🔥 What To Do If You're Assigned (Or At Risk of Assignment) On an Short Option
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COMMENTS

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 ...
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.
Trading Options: Understanding Assignment
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.
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. These include:
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 ...
How Option Assignment Works: Understanding Options Assignment
What is the Risk of Assignment? The risks associated with options assignment are primarily centered around the obligations of the seller of the options contract.
The Assignment Risks of Writing Call and Puts
Second, there is assignment risk throughout the life of the trade for American-style options. Typically, options are assigned only when they are deep in-the-money, or when there is an advantage to exercising to capture a stock dividend (see "Dividend Considerations" below). Still, an option writer can be assigned anytime up until expiration.
Options Assignment & How To Avoid It
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. ...
Everything You Need to Know About Options Assignment Risk
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.
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 ...
Understanding the Risks of Early Assignment
Early assignment is a risk that all options traders should be aware of and prepared to manage. As you navigate the dynamic landscape of the financial markets, a mastery of these Greeks opens the ...
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'...
Understand the Option Risk with Covered Calls
The covered call strategy requires two steps. First, you already own the stock. It needn't be in 100 share blocks, but it will need to be at least 100 shares. You will then sell, or write, one ...
Long Calendar Spread with Calls
Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. While the long call in long calendar spread with calls has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that ...
Are You at Risk for Stock Assignment With Options?
If you sell a put or call spread, the assignment risk stems from your short strike expiring in the money at expiration. If this scenario happens, you will be forced to sell 100 shares to the buyer for each option contract they purchased. Likewise, if you sell a put spread you will be assigned 100 shares of stock per contract if the short strike ...
Dividend Assignment Risk: Short Call Options
Dividend assignment risk is the risk of an investor having their shares of stock assigned when they are short call options and the company pays a dividend. What option strategies are at risk of dividend assignment? Traders using any options strategy that has a short call option should be aware of dividend dates. This includes single-leg naked ...
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 ...
What Is Early Assignment Risk In Options Trading? Who Is Affected & How
The risk of assignment for the CALL options contract sellers increases when the underlying stock pays dividends and when it is nearing the ex-dividend date. The CALL options contract buyers are not entitled to dividend payments, so if they wish to receive the dividend, they will have to exercise the CALL options and become stock owners. ...
Understanding the Risks of Early Assignment
Conclusion. Early assignment is a risk that all options traders should be aware of and prepared to manage. As you navigate the dynamic landscape of the financial markets, a mastery of these Greeks opens the door to a strategic and informed approach. Please remember that options are risky, and investors can lose 100% of their investment.
options
The put vs call assignment risk, is actually the reverse: in-the-money calls are more likely to be exercised early than puts. Exercising a call locks in profit for the option holder because they can buy the shares at below market price, and immediately sell them at the higher market price. If there are dividends due, the risk is even higher.
Risk of assignment on debit spreads : r/options
As long as you do that well before expiration, you never have to think about what happens to the individual legs and the risk of early assignment on the short leg is close to zero, as long as you don't trade GME or any other squeeze play stock. One TSLA $835 call for March would cost you about $85. One TSLA 835/840 March call debit spread for ...
Understanding the Risks of Early Assignment
Capri Holdings: May 17 $35 Unusually Active Call Option Is a No-Brainer. 3 Highest-Yielding (And Safest) Dividend Aristocrats To Buy Today. Microsoft Shows Massive FCF Growth Despite High AI Spending - MSFT Looks Undervalued. Early assignment occurs when the owner of an option contract exercises it before the expiration date.
10 Common Mistakes of Options Trading
The smart option buyer recognizes these risks and works to reduce them through patience and an understanding of the "Greeks," or the various factors that determine an options price.
Assignable Contracts Basics and When To Use Them
If the assignment lowers the value of returns or anticipated returns, affects the expected performance outlined in the contract, or increases potential risks for the other contract party. The assignment would violate public policy or the law. For instance, the federal government prohibits certain claim assignments against the government.
Risk Assessment: Process, Examples, & Tools
A risk assessment is a systematic process performed by a competent person which involves identifying, analyzing, and controlling hazards and risks present in a situation or a place. This decision-making tool aims to determine which measures should be put in place in order to eliminate or control those risks, as well as specify which of them ...
AUDITING ASSIGNMENT 2
2023 ODL Assignment 2 Refer to the financial statement of the attached 2020 Annual report for Lafarge Zambia. a) Using the two year comparative financial statement perform a Comparison analysis, Identify and explain specific risks of material misstatement. Profit (Loss) Before Tax: The company has reported a significant increase in profit before tax from K342,057 in 2019 to K363,035 in 2020.

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Understanding assignment risk in Level 3 and 4 options strategies

Credit call spreads

Short (naked) call

Here's a call example

Here's a put example:

All spreads that have a short leg

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What is Options Assignment & How to Avoid It

Video Breakdown of Options Assignment

What is Assignment?

Who Can Be Assigned?

Who Risks being Assigned Early?

How can you Minimize Assignment Risk?

FAQs about Assignment

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

2. How does assignment affect your P&L?

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

4. How does assignment work for index options?

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

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Everything You Need to Know About Options Assignment Risk

What is Assignment in Options Trading?

What is Early Assignment in Options Trading?

Why Early Assignment is Nothing to Fear

Exercising Options Early Burns Money

Your Risk Doesn’t Change

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Understanding the Risks of Early Assignment

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Long calendar spread with calls

Explanation

Example of long calendar spread with calls

Maximum risk

Breakeven stock price at expiration of the short call

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Appropriate market forecast

Strategy discussion

Impact of stock price change