"How To Get DITM Covered Call Assigned Early?"
"First of all, I would like to congratulate you on your superb and informative website! I am completely new to this subject but would like to ask a question about writing in the money covered calls. You describe the advantages of deep in the money covered call writing, however some superficial looking at some figures I don''t seem to be able to easily find examples for this that actually make money after trading costs. However I was thinking about buy-writing in the money call options with short expiry with the hope that the call option would be exercised and I don''t have to sell the stock at the end. for example, looking at MGM mirage, trading at $14.77 the January calls with 14 strike sell at $1.15; which would give me a profit of around $38 before commission on a requirement of $1362, a return of 2.8% for an option that expires in 25 days; however if I buy-write the February 14 call I could make $82 but then obviously the risk for me increases. I understand
that if an option expires ITM it will be assigned - which is what I want for this strategy; however, how likely is it - for example with the figures mentioned - that one gets assigned immediately or within a few days. In a way this could be a very safe strategy, as you mention, to buy-write in the money call options. However , is it possible to answer the question of ''how much'' ITM the option need to be to have a very high chance of being assigned? hope this makes sense"
- Asked By HC on 28 Dec 2010
Answered by Mr. OppiE
Thank you for enjoying www.Optiontradingpedia.com!
Indeed, getting assigned
as quickly as possible is what all short term Covered Call writers want happen for their position as it eradicates round trip commission and of course, saves you a bunch of time, money and emotional energy.
However, getting assigned is really a random process and only happens before options expiration
when there are options traders on the long side of the same options contract
exercising their options. For a stock that pays little or no dividends there is almost no reason at all anyone would exercise
their options which has significant amount of extrinsic value
remaining and therefore chances of the position getting assigned early diminishes.
In general, the more in the money
and the closer to expiration an option is, the higher the chance that it will be assigned before expiration. Of course, you would know that all in the money options get assigned during expiration itself, so if you are a short term DITM Covered Call
writer, your stocks would still be called away by expiration if the call options remain in the money without having to sell the stocks yourself.
The reason why the deeper in the money an option is, the higher the chances becomes for it to become assigned is due to the fact that it will come to a point where the option gets so deep in the money that there is little or no extrinsic value left in it. When that situation arises, some call options traders, having already profited from the upwards movement and having the opinion that the stock might go much higher, might simply exercise the option for the stocks in order to continue holding on to it for more profit. As such, writing DITM Covered Call inherently carries a high chance of early assignment.
Similarly, extrinsic value diminishes as expiration draws nearer and call options traders might be enticed to exercise their call options in order to hold on to the stocks for longer period of time instead of holding the call options through expiration, risking a sudden dip that might take the call options out of the money on expiration day itself.
as long as you are writing deep in the money options, the chances of getting assigned early is high but completely random so there is no way to tell when it is exactly going to happen.