I was assigned on my March 40 put option when
the stock value went below $38, even though it wasn't expiration. On another
stock, I had a covered write position where I was short a 70 call which went
in-the-money by $7, and the call wasn't assigned until expiration day.
How can
I tell when I will be assigned?
I recently wrote a call option. At the market close on expiration Friday,
the option was 41 cents (.41) in-the-money. My broker told me that calls are
"automatically" assigned when they are a certain amount in the money at
expiration.
Is there is a way that I can avoid being assigned?
I was assigned on my March 40 put option when the stock value went below $38,
even though it wasn't expiration. On another stock, I had a covered write
position where I was short a 70 call which went in-the-money by $7, and the
call wasn't assigned until expiration day. How can I tell when I will be
assigned?
The short answer is that you can never tell when you will be assigned. Once
you sell an option (put or call), you have the potential for being assigned to
fulfill your obligation to receive (and pay for) or deliver (and get paid for)
shares of stock on any business day. In some circumstances, you may be
assigned on a short option position while the underlying shares are halted for
trading, or perhaps while they are the subjects of a buyout or takeover. To
ensure fairness in the distribution of equity and index option assignments,
The Options Clearing Corporation utilizes a random procedure to assign
exercise notices to the accounts maintained with OCC by each Clearing Member.
The assigned firm must 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.
Having said that, there are some generalizations which might help you
understand when you might be more likely to be assigned on a short-option
position.
Only about 10% of options end up being exercised; the percentage hasn't varied
much over the years. That does not mean that you can only be assigned on 10%
of your short option, however. It means that, in general, option exercises are
not that common.
The majority of option exercises (and the corresponding assignments) take
place as the option gets closer to expiration. Without getting into the math
too much, it usually doesn't make sense to exercise an option, which has any
time premium over intrinsic value. For most options, that doesn't occur until
close to expiration.
In general terms, a put which goes in-the-money is more likely to be exercised
than a call which goes in-the-money. Why? Think about the result of an
exercise. An investor who exercises a put uses it to sell shares and receive
cash. A person exercising a call option uses it to buy shares and must pay
cash. People are more likely to exercise options if it means they can receive
cash sooner. The opposite is true for calls, where exercise means you have to
pay cash sooner.
The bottom line is that you really don't have any sure-fire way to predict
when you will be assigned on a short option position; it can happen any day
the stock market is open for trading.
How could I be assigned if my covered calls are in-the-money?
The option holder has the right to exercise his or her options position
prior to expiration regardless of whether the options are in- or
out-of-the-money. You can be assigned if an investor or market professional
holding calls of the same series as your short position submits an exercise
notice to his or her brokerage firms, which in turn, submitted an exercise
notice to The Options Clearing Corporation (OCC) (or if the brokerage firm is
not an OCC Clearing Member, then it would submit the notice to a firm that is
an OCC Clearing Member, and that Member would then submit the notice to OCC).
OCC randomly assigns exercise notices to Clearing Members in whose accounts
have short positions of the same series. The Clearing Member then assigns the
exercise to one of its short positions using a fair assignment method, though
not necessarily random. You should ask your brokerage firm how it assigns
exercise notices to its customers.
I sold short 10 options contracts recently. Unfortunately, I was assigned
early on each contract, one at a time. Couldn't all the contracts have been
assigned at once?
The exercise of an option prior to expiration is solely at the discretion
of the buyer. The option buyer can also decide how many contracts in a
multi-contract position to exercise at a given time. Once an exercise notice
is tendered, The Options Clearing Corporation randomly selects for assignment
a member brokerage firm carrying a short position in that series. The
brokerage firm may, in turn, assign the notice randomly, or on a "first-in,
first-out" basis. Regardless of what method is applied by the brokerage firm,
equity options writers are subject to the risk each day that some or all of
their short options may be assigned.
What time each day does the Clearing Firm receive information regarding
assignments etc. from OCC?
OCC's Clearing Members can submit exercise notices, on a daily basis, up to
7:00 PM Central Time, and in general each Clearing Member will establish its
own (earlier) deadline for its customers. (There is a different set of
procedures for expiring options.) As part of its nightly processing, OCC
randomly assigns its Clearing Members based on the days exercises. This
processing is completed at approximately 1:00 AM Central Time. OCC transmits
the assignments to its Clearing Members and as part of the Member's nightly
processing, they allocate the assignments to their customers on either a
random basis or a first in - first out basis.
We understand the exchanges’ rules are that customers should be notified of
assignments in a timely manner. It is best that you and your broker determine
what constitutes ‘timely manner’ beforehand: Does ‘timely manner’ mean a call
the morning of the assignment? Is there an update to your account that you can
view online? Will you receive a letter in the mail?
For expirations, OCC process all exercise/assignments on Saturday. OCC's
processing is completed and transmitted to its Clearing Members late Saturday
night. Clearing Members will process expiration exercises and assignments on
Sunday and then notify their customers the next business day. Once again, you
can probably get an approximation from your broker.
I
recently wrote a call option. At the market close on expiration Friday,
the option was 41 cents (.41) in-the-money. My broker told me that calls are
"automatically" assigned when they are a certain amount in the money at
expiration. Is there is a way that I can avoid being assigned?
While each firm may have their own thresholds, the Option Clearing
Corporation's auto exercise threshold as of September 2004 is 25 cents (.25)
in the customers account. (The automatic exercise threshold in firms and
market makers accounts is 15 cents (.15).) Customers and Brokers should check
with their firm's Operations Department to determine their company's policies
regarding exercise thresholds. An option holder has the right to exercise
their option regardless of the price of the underlying security. It might be a
good practice for all option holders to express their exercise - or
non-exercise - instructions to their broker. Is there a magic number that
ensures that option writers will not be assigned? The answer would be 'NO'.
Although unlikely, an investor may choose to exercise a slightly out of the
money option or choose not to exercise an option that is in the money by
greater than 25 cents (.25).
Some investors use the saying, "when in doubt, close them out". This means
that if they buy back any short contracts they are no longer at risk of being
assigned.
I wrote a slightly out-of-the-money covered call. The call has since moved
in-the-money. Is there any way to avoid option assignment?
The most obvious and straight forward action would be to close out the
position by buying the call back. While this may not be attractive and may
result in a loss, or less than hoped for gain, it will assure that your stock
will not be called away. Some alternatives to being assigned are to "roll out
and up". To roll out and up involves buying back the current option and
selling a higher strike in a further out month. This may allow an investor to
gain some additional time premium and added stock appreciation. You will want
to consult your broker for any advice on this strategy.
An excellent first read on the subject,
this book carefully and completely defines the terminology, explains options
investing step by step, and presents strategies so that it is easy to understand
at each level of risk involved.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
