Options Assignment - Introduction
Yes, the horrors of getting your options exercised (assigned) automatically!
This is what alot of options beginners fear but is it really that scary?
An options assignment happens when short stock options positions opened by an options writer is assigned for fulfillment.
The short options positions disappear and the options writer sells the underlying stock if call options were written or buys the underlying stock if put options were written. Assignment can happen randomly for short in the money options before expiration even though assignment is mandatory for short in the money options during options expiration in what is known as an Automatic Assignment.
This tutorial shall cover the different options assignment issues that you might face in options trading.
Options Assignment Prior to Expiration
Options assignment prior to expiration, or early assignment, is completely random and might happen as long as you hold short
in the money options. Even though there are some generalisations over the kind of options that typically gets assigned, there is no sure way you can tell if you would be the next candidate for an assignment and that creates uncertainty when shorting in the money options in options trading. This is also why
options margin is required when
writing options. That is to ensure that you have sufficient funds to meet assignment requirements.
You get an "assignment notice" when your short options are assigned. Options assignments occur when buyers of options
exercise the options they bought. The Options Clearing Corporation (OCC) then uses a random procedure to assign exercise notices to Clearing members under them. These firms then use an exchange approved method (usually a random process or the "first-in, first-out" method) to allocate those notices to accounts which are short the options.
Please note at this point that option assignment prior to expiration happens only to
American style options which could be exercised before expiration. European style options which could not be exercised before expiration would not be subjected to early options assignment.
Generalisations about Options Assignments
1. The more in the money the short options are, the more likely they are to be assigned.
2. The nearer to expiration, the higher the chances of assignment.
3. The nearer to ex-dividend date, the higher the chances of assignment for short in the money call options. Read about
effects of dividends on stock options.
4. About 12% of all options get exercised which translates to about 12% of all short options get assigned. Hence options assignments are not common.
5. Short In the money put options have a higher chance of being assigned than short in the money call options as generally, more put options are exercised than call options.
Options Assignment During Expiration
All short stock options which are 1 cent or more in the money during expiration will be automatically assigned in what is known as an "Automatic Assignment" by the OCC. Even though different brokers might have different thresholds, it rarely differs much from the OCC threshold.
Options assignment in options trading do not happen only when you write straight naked options. Options assignment in options trading can also happen to options which are written as part of an options trading strategy! This is why all options traders using complex options strategies need to take all possible options assignment scenarios into consideration when executing their options trading strategies in order to prevent an unexpected margin call.
Options Assignment Questions:
:: What To Do When One Leg of Bull Call Spread Is Assigned?
:: What To Do When Short Leg of Put Spread is Assigned?
:: Automatic Assignment Once Strike Price is Hit?
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