Option trading assignment

Assignment.

What is an 'Assignment'

An assignment is the transfer of an individual's rights or property to another person or business. For example, when an option contract is assigned, an option writer has an obligation to complete the requirements of the option contract. If the option was a call, or put, option, the writer would have to sell, or buy, the underlying security at the stated strike price.

BREAKING DOWN 'Assignment'

Assignment means transferring some or all property rights and obligations to another person through a written agreement. For example, a payee assigns rights for collecting note payments to a bank. A trademark owner transfers, gives or sells another person interest in the trademark. To be effective, an assignment must contain parties with legal capacity, consideration, consent and legality of object.

Examples of Assignment.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans or other obligations. Money is automatically subtracted from a worker's paycheck without consent if the obligor has a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from his paycheck weekly or monthly and sent to the lender. Wage assignments are helpful in paying back long-term debts.

A mortgage assignment is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments and potentially modifying the mortgage terms. A mortgage assignment is beneficial for a seller with a home on the market long term and for a buyer not wanting to secure a bank loan. Many real estate companies facilitate mortgage assignments in this situation.

A lease assignment benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files bankruptcy. Any rental income is paid directly to the lender.

The Mechanics of Option Trading, Exercise, and Assignment.

Options were originally traded in the over-the-counter ( OTC ) market , where the terms of the contract were negotiated. The advantage of the OTC market over the exchanges is that the option contracts can be tailored: strike prices, expiration dates, and the number of shares can be specified to meet the needs of the option buyer. However, transaction costs are greater and liquidity is less.

Option trading really took off when the first listed option exchange—the Chicago Board Options Exchange ( CBOE )—was organized in 1973 to trade standardized contracts, greatly increasing the market and liquidity of options. The CBOE was the original exchange for options, but, by 2003, it has been superseded in size by the electronic International Securities Exchange (ISE), based in New York. Most options sold in Europe are traded through electronic exchanges. Other exchanges for options in the United States include: NYSE Euronext (NYX), and the NASDAQtrader.

Option exchanges are central to the trading of options:

they establish the terms of the standardized contracts they provide the infrastructure — both hardware and software — to facilitate trading, which is increasingly computerized they link together investors, brokers, and dealers on a centralized system, so that traders can from the best bid and ask prices they guarantee trades by taking the opposite side of each transaction they establish the trading rules and procedures.

Options are traded just like stocks—the buyer buys at the ask price and the seller sells at the bid price . The settlement time for option trades is 1 business day ( T+1 ). However, to trade options, an investor must have a brokerage account and be approved for trading options and must also receive a copy of the booklet Characteristics and Risks of Standardized Options .

The option holder, unlike the holder of the underlying stock, has no voting rights in the corporation, and is not entitled to any dividends. Brokerage commissions , which are a little higher for options than for stocks, must also be paid to buy or sell options, and for the exercise and assignment of option contracts. Prices are usually quoted with a base price plus cost per contract, usually ranging from $5 to $15 minimum charge for up to 10 contracts, with a lower per contract charge, typically $0.50 to $1.50 per contract, for more than 10 contracts. Most brokerages offer lower prices to active traders. Here are some examples of how option prices are quoted:

$9.99 + $0.75 per contract for online option trades $9.99 + $0.75 per contract for online option trades; phone trades are $5 more, and broker-assisted trades are $25 more $1.50 per contract with a minimum standard rate of $14.95, with numerous discounts for active traders Sliding commission scale ranging from $6.99 + $0.75 per contract for traders making at least 1500 trades per quarter to $12.99 + $1.25 per contract for investors with less than $50,000 in assets and making fewer than 30 trades per quarter. $19.99 for exercise and assignments.

The Options Clearing Corporation (OCC)

The Options Clearing Corporation ( OCC ) is the counterparty to all option trades. The OCC issues, guarantees, and clears all option trades involving its member firms, which includes all U. S. option exchanges, and ensures that sales are transacted according to the current rules. The OCC is jointly owned by its member firms — the exchanges that trade options — and issues all listed options, and controls and effects all exercises and assignments. To provide a liquid market, the OCC guarantees all trades by acting as the other party to all purchases and sales of options.

The OCC, like other clearing companies, is the direct participant in every purchase and sale of an option contract. When an option writer or holder sells his contracts to someone else, the OCC serves as an intermediary in the transaction. The option writer sells his contract to the OCC and the option buyer buys it from the OCC.

The OCC publishes, at optionsclearing, statistics, news on options, and any notifications about changes in the trading rules, or the adjustment of certain option contracts because of a stock split or that were subjected to unusual circumstances, such as a merger of companies whose stock was the underlying security to the option contracts.

The Exercise of Options by Option Holders and the Assignment to Fulfill the Contract to Option Writers.

When an option holder wants to exercise his option, he must notify his broker of the exercise, and if it is the last trading day for the option, the broker must be notified before the exercise cut-off time , which will probably be earlier than on trading days before the last day, and the cut-off time may be different for different option classes or for index options. Although policies differ among brokerages, it is the duty of the option holder to notify his broker to exercise the option before the cut-off time.

When the broker is notified, then the exercise instructions are sent to the OCC, which then assigns the exercise to one of its Clearing Members who are short in the same option series as is being exercised. The Clearing Member will then assign the exercise to one of its customers who is short in the option. The customer is selected by a specific procedure, usually on a first-in, first-out basis, or some other fair procedure approved by the exchanges. Thus, there is no direct connection between an option writer and a buyer.

To ensure contract performance, option writers are required to post margin, the amount depending on how much the option is in the money. If the margin is deemed insufficient, then the option writer will be subjected to a margin call. Option holders don't need to post margin because they will only exercise the option if it is in the money. Options, unlike stocks, cannot be bought on margin.

Because the OCC is always a party to an option transaction, an option writer can close out his position by buying the same contract back, even while the contract buyer retains his position, because the OCC draws from a pool of contracts that have no connection to the original contract writer and buyer.

A diagram outlining the exercise and assignment of a call.

Example—No Direct Connection between Investors Who Write Options and those Who Buy Them.

John Call-Writer writes an option that legally obligates him to provide 100 shares of Microsoft for the price of $30 until April, 2007. The OCC buys the contract, adding it to the millions of other option contracts in its pool. Sarah Call-Buyer buys a contract that has the same terms that John Call-Writer wrote—in other words, it belongs to the same option series . However, option contracts have no name on them. Sarah buys from the OCC, just as John sold to the OCC, and she just gets a contract giving her the right to buy 100 shares of Microsoft for $30 per share until April, 2007.

Scenario 1—Exercises of Options are Assigned According to Specific Procedures.

In February, the price of Microsoft rises to $35, and Sarah thinks it might go higher in the long run, but since March and April generally are volatile times for most stocks, she decides to exercise her call (sometimes referred to as calling the stock ) to buy Microsoft stock at $30 per share to be able to hold the stock indefinitely. She instructs her broker to exercise her call; her broker forwards the instructions to the OCC, which then assigns the exercise to one of its participating members who provided the call for sale; the participating member, in turn, assigns it to an investor who wrote such a call; in this case, it happened to be John's brother, Sam Call-Writer. John got lucky this time. Sam, unfortunately, either has to turn over his appreciated shares of Microsoft, or he'll have to buy them in the open market to provide them. This is the risk that an option writer has to take—an option writer never knows when he'll be assigned an exercise when the option is in the money.

Scenario 2—Closing Out an Option Position by Buying Back the Contract.

John Call-Writer decides that Microsoft might climb higher in the coming months, and so decides to close out his short position by buying a call contract with the same terms that he wrote—one that is in the same option series. Sarah, on the other hand, decides to maintain her long position by keeping her call contract until April. This can happen because there are no names on the option contracts. John closes his short position by buying the call back from the OCC at the current market price, which may be higher or lower than what he paid, resulting in either a profit or a loss. Sarah can keep her contract because when she sells or exercises her contract, it will be with the OCC, not with John, and Sarah can be sure that the OCC will fulfill the terms of the contract if she should decide to exercise it later on.

Thus, the OCC allows each investor to act independently of the other .

When the assigned option writer must deliver stock, she can deliver stock already owned, buy it on the market for delivery, or ask her broker to go short on the stock and deliver the borrowed shares. However, finding borrowed shares to short may not always be possible, so this method may not be available.

If the assigned call writer buys the stock in the market for delivery, the writer only needs the cash in his brokerage account to pay for the difference between what the stock cost and the strike price of the call, since the writer will immediately receive cash from the call holder for the strike price. Similarly, if the writer is using margin, then the margin requirements apply only to the difference between the purchase price and the strike price of the option. Full margin requirements, however, apply to shorted stock.

An assigned put writer will need either the cash or the margin to buy the stock at the strike price, even if he intends to sell the stock immediately after the exercise of the put. When the call holder exercises, he can keep the stock or immediately sell it. However, he must have the margin, if he has a margin account, or cash, for a cash account, to pay for the stock, even if he sells it immediately. He can also use the delivered stock to cover a short in the stock. (Note: the reason for the difference in equity requirements is because an assigned call writer immediately receives the cash upon delivery of the shares, whereas a put writer or a call holder that purchased the shares may decide to keep the stock.)

Example—Fulfilling a Naked Call Exercise.

A call writer receives an exercise notice on 10 call contracts with a strike of $30 per share on XYZ stock on which she is still short. The stock currently trades at $35 per share. She does not own the stock, so, to fulfill her contract, she has to buy 1,000 shares of stock in the market for $35,000 then sell it for $30,000, resulting in an immediate loss of $5,000 minus the commissions of the stock purchase and assignment.

Both the exercise and assignment incur brokerage commissions for both holder and assigned writer. Generally, the commission is smaller to sell the option than it is to exercise it. However, there may be no choice if it is the last day of trading before expiration. Although the buying and selling of options is settled in 1 business day after the trade, settlement for an exercise or assignment occurs on the 3 rd business day after the exercise or assignment ( T+3 ), since it involves the purchase of the underlying stock.

Often, a writer will want to cover his short by buying the written option back on the open market. However, once he receives an assignment, then it is too late to cover his short position by closing the position with a purchase. Assignment is usually selected from writers who are still short at the end of the trading day. A possible assignment can be anticipated if the option is in the money at expiration, the option is trading at a discount, or the underlying stock is about to pay a large dividend.

The OCC automatically exercises any option that is in the money by at least $0.50 ( automatic exercise , Exercise-by-Exception , Ex-by-Ex ), unless notified by the broker not to. A customer may not want to exercise an option that is only slightly in the money if the transaction costs would be greater than the net from the exercise. In spite of the automatic exercise by the OCC, the option holder should notify his broker by the exercise cut-off time , which may be before the end of the trading day, of an intention to exercise. Exact procedures will depend on the broker.

Any option that is sold on the last trading day before expiration would likely be bought by a market maker. Because a market maker's transaction costs are lower than for retail customers, a market maker may exercise an option even if it is only a few cents in the money. Thus, any option writer who does not want to be assigned should close out his position before expiration day if there is any chance that it will be in the money even by a few pennies.

Early Exercise.

Sometimes, an option will be exercised before its expiration day—called early exercise , or premature exercise . Because options have a time value in addition to intrinsic value, most options are not exercised early. However, there is nothing to prevent someone from exercising an option, even if it is not profitable to do so, and sometimes it does occur, which is why anyone who is short an option should expect the possibility of being assigned early.

When an option is trading below parity (below its intrinsic value), then arbitrageurs can take advantage of the discount to profit from the difference, because their transaction costs are very low. An option with a high intrinsic value will have very little time value, and so, because of the difference between supply and demand in the market at any given moment, the option could be trading for less than its true worth. An arbitrageur will almost certainly take advantage of the price discrepancy for an instant profit. Anyone who is short an option with a high intrinsic value should expect a good possibility of being assigned an exercise.

Example—Early Exercise by Arbitrageurs Profiting from an Option Discount.

XYZ stock is currently at $40 per share. Calls on the stock with a strike of $30 are selling for $9.80. This is a difference of $0.20 per share, enough of a difference for an arbitrageur, whose transaction costs are typically much lower than for a retail customer, to profit immediately by selling short the stock at $40 per share, then covering his short by exercising the call for a net of $0.20 per share minus the arbitrageur's small transaction costs.

Option discounts will only occur when the time value of the option is small, because either it is deep in the money or the option will soon expire.

Option Discounts Arising from an Imminent Dividend Payment on the Underlying Stock.

When a large dividend is paid by the underlying stock, its price drops on the ex-dividend date, resulting in a lower value for the calls. The stock price may remain lower after the payment, because the dividend payment lowers the book value of the company. This causes many call holders to either exercise early to collect the dividend, or to sell the call before the drop in stock price. When many call holders sell at the same time, it causes the call to sell at a discount to the underlying, thereby creating opportunities for arbitrageurs to profit from the price difference. However, there is some risk that the transaction will lose money, because the dividend payment and drop in stock price may not equal the premium paid for the call, even if the dividend is more than the time value of the call.

Example—Arbitrage Profit/Loss Scenario for a Dividend-Paying Stock.

XYZ stock is currently trading at $40 per share and is going to pay a dividend of $1 the next day. A call with a $30 strike is selling for $10.20, the $0.20 being the time value of the premium. So an arbitrageur decides to buy the call and exercise it to collect the dividend. Since the dividend is $1, but the time value is only $0.20, this could lead to a profit of $0.80 per share, but on the ex-dividend date, the stock drops to $39. Adding the $1 dividend to the share price yields $40, which is still less than buying the stock for $30 plus $10.20 for the call. It might be profitable if the stock does not drop as much on the ex-date or it recovers after the ex-date sufficiently to make it profitable. But this is a risk for the arbitrageur, and this transaction is, thus, known as risk arbitrage , because the profit is not guaranteed.

2005 Statistics for the Fate of Options.

The Options Clearing Corporation reported the following statistics for 2005:

Even though this statistic is more than a decade old, it is still representative of the fate of options.

All option writers who didn't close out their position earlier by buying an offsetting contract made the maximum profit—the premium—on those contracts that expired. Option writers have lost at least something when the option is exercised, because the option holder wouldn't exercise it unless it was in the money. The more the exercised option was in the money, the greater the loss is for the assigned option writer and the greater the profits for the option holder. A closed out transaction could be at a profit or a loss for both holders and writers of options, but closing out a transaction is usually done either to maximize profits or to minimize losses, based on expected changes in the price of the underlying security until expiration.

How Does Assignment Work?

Posted by Pete Stolcers on July 17, 2008.

Option Trading Question.

Robert states, "My question regards the assignment of options. I'm not exactly sure how the dynamics work and how to determine if I'm in danger of being assigned. Suppose I sell a call, when does the person on the other side get to buy the call you put up for sale?

Option Trading Answer.

Great question. Before I get started, let me clarify a point. The person does not get to buy the call, he gets to buy the stock at the strike price.

The answer is relatively involved so I will try to answer it in stages. First of all, let’s keep it simple and say that you sold a front month call for $2 and it expires in 3 weeks. The stock was at $48 and the call had a strike price of $50. As the seller, you have no rights (you are at the mercy of the buyer). The buyer of the call has the right to buy the stock at $50. If he elects to exercise that right, you are obligated to sell him shares at $50. Obviously, with the stock at $48 he will not elect to do that. He can go into the open market and buy shares for less than $50. The option is out-of-the-money (OTM).

Now let’s say the stock has rallied and it is currently trading for $52 with a week left until expiration. The options are in-the-money (ITM) and they have value. In this case, the options are worth $2. The option buyer could elect to sell the shares of stock in the open market for $52 and exercise his call options. Effectively he is selling the stock at $52 and buying it at $50. The difference is $2 and that represents the intrinsic value (parity). Since there is still a week before expiration, the option will carry some premium above and beyond parity. If the $50 call is trading for $2.50, the buyer of the option will simply sell it in the open market. In doing so, he will get $2.50 instead of $2.00. If he sells the option in the open market, no one gets assigned.

Let’s suppose we are in the home stretch and it is expiration week. With three days to go, the stock is trading at $53.90 x $54.00 and the option is trading $3.80 x $4.10. The option buyer looks at the market and figures he might be able to split the bid/ask and sell the stock for $53.95. Once he is filled he exercises his call and effectively gets out of the trade for $3.95. That is $.15 better than if he sold the option in the open market for $3.80.

The option buyer must submit his exercise notice no later than 15 minutes after “the bell” in any given day. This rule is in place so that he can’t force delivery based on news that comes out “after hours” on expiration Friday.

Once an exercise has been submitted by the brokerage firm to the OCC (Options Clearing Corp) there is a standardized method of allocating the assignment to each of the brokerage firms that have a short position in that option. The brokerage firm will receive their allotment from the OCC and through a standardized lottery system. they will determine which accounts in the firm get assigned. The communication that takes place between the brokerage firm and the customer once that happens varies from one firm to another. If there is a long stock position to offset the short stock, they will normally flatten out the position.

If you were short a call option and you were assigned, you will come in the next day short stock. If you buy in your short stock that day, you are permitted to use a rule called “same day substitution” that prevents you from having to put up the short stock margin.

You will run the risk of assignment when the option is bid below parity. That will only happen if the option is ITM. If it is barely ITM, it might not trade below parity until the last few minutes. If it is ITM by less than $1, it will probably trade under parity the day of expiration. If it is ITM by more than $4, the option can trade below parity a week or even two before expiration if the stock is not very volatile. I have seen options that are ITM by more than $15 get assigned a month before expiration. Look at the bid of the option to figure out if you run the risk of assignment.

Here is an important point to remember. In the case of a call option, if the stock is bid more than a quarter of a point higher than the strike (i. e $50.25) at the close on expiration Friday, it will go through auto exercise/assignment. That is why it is important to close at-the-money positions out at expiration unless you don’t mind delivery. The buyer may not want to take delivery of the stock but if he leaves the position open, he will be long shares of stock Monday morning.

There are many twists and turns to assignment on cash settled American Style options like the OEX. You’d better know the intricacies or it could cost you a lot of money.

Thanks for the question Robert. You just won a one month subscription to the OneOption service of your choice.

Option Trading Comments.

On 06/30, Louis Meluso said:

If an account had a synthetic long stock position, let’s say, deep ITM Put and Call same strikes postion and the more valuable option got exercised, would the clearing firm, OCC, use the oppossing option to settle?

The answer is no. In a synthetic, if you had an ITM put, that would mean that the call is OTM. You would be long the stock after assignment and long an OTM call. If you wanted to exit, you would sell the stock. The brokerage firm or Options Clearing Corp. (OCC) would screw you if they excercised the call because you would be paying more for the stock (strike price) than the stock was trading for in the open market.

Hope this make sense.

Greetings and thanks for your answer. I am long the stock come exp friday and long a deep itm put as a hedge. the put was in the money at exp and was never exercised (my bad) on exp friday. come Monday, where will I stand. thanks.

It is always easier for readers to understand the reponse when real numbers are provided.

If you are long a stock that is trading at $95 and long a $100 put (deep ITM) then you will be auto-assigned. The Option Clearing Corp (OCC) assigns all options that are more than $.15 in-the-money.

Come Monday, you will be flat. You will have sold stock at $100 via the exercise of your puts.

I am new to this. If I buy a call option at $2.00, what amount is the most I can lose? Is it the stock price or call price?

The most you can lose when you buy a call option or a put option is the premium paid. In your case, it is $2.

You may have already answered this but.

If I am “EARLY” assigned on the short leg of an options spread on say �Tuesday� of the expiration week, and this happens 20 minutes before market close for the day, how does Same-day-substitution work in this case? For instance if I have a bull call debit spread and I have purchased the 30 call option for symbol xyz—and shorted the 35 call option stock symbol xyz. If I am assigned the short leg of the option spread 20 minutes before market close for that day (again say it is Tuesday the week of expiration i. e. EARLY assignment) must I execute the long leg of the spread or put up the shares of xyz that SAME DAY (Tuesday) within this narrow 20 minute period? Does same day substitution give me only 20 minutes in this scenario to provide the shares or exercise my long position or am I notified after hours and then I have the next day to handle this situation? I hope it is the case that I would have next day to deal with the short assignment of the spread. If I only have 20 minutes to respond to the assignment, how could I avoid this other than always unwinding spreads weeks out? And my broker said they would NOT automatically exercise my long call leg of the spread to close the spread and that I was responsible for doing that.

Assignment is not known until after the market closes and you do have the entire next day to dael with it.

Thank goodness! No one else I ever asked explained that assignment occured after the market had closed for the day, or else I don’t remember anyone else mentioning that.

Thanks for answering.

Discovered you today. Great.

You already answered two big questions I had.

with your answer to Robert.

Here’s another one: I wrote a strangle and I’m early assigned on the call but without knowing it and fearing it I closed the position buying back the strangle at a cost. What happens to me? When do I know that I was assigned(depends from the broker ?)? There could be a big change in the price of the stock, negative for me, before I can buy it to deliver. I am very confused and worried about this lack in certainty about trading options. Specially the timings involved in the things I said before are very confused to me.

Best regards from Gano.

The assignment process only starts after the closing bell. If you closed the position during trading hours, there is no way you could get assigned. Brokerage firms receive notification from the OCC after the close. Then the brokerage firm, through a lottery, determines which accounts (with an open position) will get assigned. Bottom line, buy in your short and there is no chance for assignment.

Instead of selling naked strangles, buy a far OTM option for protection. That will reduce your fear and risk.

Selling naked strangles requires a huge account and vast experience. It is the riskiest option strategy and there are suitability rules that brokerage firms have to obey. Most firms won’t approve you for the strategy. Make sure you know all of the ins and outs before you start.

You state auto assignment is executed if the PPS is more that 0.25 higher than the strike.

I believe this has been amended to 0.05 higher than the strike. THEN auto assignment is triggered.

Can you confirm this?

Yes this has changed.

The OCC’s (Option Clearing Corp)threshold for auto assignment is $.01 in the money. Each brokerage firm sets their own threshold and traders need to check the policies before trading.

My broker said if I get assigned for my Short November Call, I can offset the assignment by exercising my Long December Call. This is done without having to buy any shares. Is this correct because wouldn’t this be a day late?

When you are assigned on a short option position, you have one day to react without having to meet normal margin requirements. This is known as same day substitution.

You can exercise your long Dec call, but that would not be the most effidient way to exit the trade. Chances are, the options still carry some time premium. You would buy the shares of stock you are short (due to Nov assignment) and sell the Dec calls in the open market.

The only exception to this would be if the Dec calls are trading at parity or a discount. Then you would exercise them.

I am buying a debit spread in a fairly expensive stock where I buy 1 ATM $600 call for $12.00 and sell 1 $620 call for $5.00. if the stock runs to $650 in a couple of days (expiration is 30 days away) and I am early assigned on the short $620 call, do I need $60,000 in my account to exercise my $600 call to buy the stock to cover the assignment? How would this work?

You can immediately exercise your $620 call after being assigned without any margin requirement. You would want to do it right away since you have maxed out on the trade.

I had a $65.00 calendar call spread on BUCY. The short portion was the March 65s and the long was Apr 65s. The stock closed Friday (option exp) 65.05 last, although I did not see that price until a few minutes afetr 4:00pm. I left the short side open thinking it would expire worthless. Now I see that I have a “potential maint call” of $26,800 + a “potential day trade call” of $145,770. I’m confused. The highest BUCY traded for after hours was $65.056 and the lowest was $64.8537. The highest it sold for inn the 15 minutes after the close was $65.043. What did I do wrong? Thanks.

It is often best to buy the options back for $.05 when they are right at the strike.

The alternative is to wait and see if you are assigned. If you come in short stock Monday, you can buy the shares back that day without putting up the margin. That is known as same day substitution. If the stock spiked, you could also exercise your calls to flatten out. This is not as desireable since the calls are likely to carry premium.

Buy the stock back and sell the calls to unwind.

My question is on option assignment. If I am long a put spread where the long and short positions expire in the money. Will the positions be netted against each other at expiration and just credit me the difference? I didn’t know if there was any reason to close out the position prior to expiration?

You are correct. Both positions will be assigned/exercised and the difference in the strike prices will be credited or debited (depending on if you bought or sold the spread). No action required.

I had a call credit spread on SPY - short at $118, long at $120 on closing Friday (weekly option). At market close, SPY was at $117.97. After hours, the stock crept to 118.20. I ended up getting assigned short shares. Is this consistent with the “rules?”

Yes, that is consistent with the rules. Often there are stock buy imbalances on the close and it take a few minutes for the cash index (ETF) to catch up. All of the stocks in the basket are in a flux as they settle.

Regardless, the owner of the calls does have time after the close to exercise the calls. Most borkerage firms have a 30 minute “window\” to submitt the exercise notice to the OCC.

Best practice is to buy the options back if they are close to the strike. Then you can avoid the risk.

I have a short call vertical where both legs are in the money at expiration. So they balance each other out . “no action required”. It’s just 2 contracts & one thing I learned is my brokerage charges $15 to exercise and $15 to assign, a total of $30. In my case then it’s cheaper to pay the commission to close the position.

I don’t know what your commissions are, but if it is a $5.00 spread, you won’t be able to sell it for that. The Market Makers have no incentive to take you out at $5.00. They will bid $4.95 for the spread and then they can make $.05. Given the extra $.05, auto exercise/assignment might make sense even though the commissions are a little higher.

Option Exercise & Assignment.

To exercise an option is to execute the right of the holder of an option to buy (for call options) or sell (for put options) the underlying security at the striking price.

American Style vs European Style.

American style options can be exercised anytime before the expiration date. European style options on the other hand can only be exercised on the expiration date itself. Currently, all of the stock options traded in the marketplaces are American-Style options.

When an option is exercised by the option holder, the option writer will be assigned the obligation to deliver the terms of the options contract.

Assignment.

Assignment takes place when the written option is exercised by the options holder. The options writer is said to be assigned the obligation to deliver the terms of the options contract.

If a call option is assigned, the options writer will have to sell the obligated quantity of the underlying security at the strike price.

If a put option is assigned, the options writer will have to buy the obligated quantity of the underlying securty at the strike price.

Once an option is sold, there exist a possibility for the option writer to be assigned to fulfil his or her obligation to buy or sell shares of the underlying stock on any business day. One can never tell when an assignment will take place. To ensure a fair distribution of assignments, the Options Clearing Corporation uses a random procedure to assign exercise notices to the accounts maintained with OCC by each Clearing Member. In turn, the assigned firm must use an exchange approved way to allocate those notices to individual accounts which have the short positions on those options.

Options are usually exercised when they get closer to expiration. The reason is that it does not make much sense to exercise an option when there is still time value left. Its more profitable to sell the option instead.

Over the years, only about 17% of options have been exercised. However, it does not mean that only 17% of your short options will be exercised. Many of those options that were not exercised were probably out-of-the-money to begin with and had expired worthless. In any case, at any point in time, the deeper into-the-money the short options, the more likely they will be exercised.

You May Also Like.

Continue Reading.

Buying Straddles into Earnings.

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks.

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options.

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing.

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call.

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls.

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls.

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options.

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It.

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity.

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks.

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks". [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis.

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Follow Us on Facebook to Get Daily Strategies & Tips!

Options Basics.

Options Strategies.

Options Strategy Finder.

Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.

The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.