early assignment on puts

Please upgrade your browser

E*TRADE uses features that may not be supported by your current browser and might not work as intended. For the best user experience, please use an updated browser .

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.

Options Exercise, Assignment, and More: A Beginner's Guide

So your trading account has gotten options approval, and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then expiration day approaches and, at the time, XYZ is trading at $105.30.

Wait. The stock's above the strike. Is that in the money 1 (ITM) or out of the money 2 (OTM)? Do I need to do something? Do I have enough money in my account? Help!

Don't be that trader. The time to learn the mechanics of options expiration is before you make your first trade.

Here's a guide to help you navigate options exercise 3 and assignment 4 —along with a few other basics.

In the money or out of the money?

The buyer ("owner") of an option has the right, but not the obligation, to exercise the option on or before expiration. A call option 5 gives the owner the right to buy the underlying security; a put option 6 gives the owner the right to sell the underlying security.

Conversely, when you sell an option, you may be assigned—at any time regardless of the ITM amount—if the option owner chooses to exercise. The option seller has no control over assignment and no certainty as to when it could happen. Once the assignment notice is delivered, it's too late to close the position and the option seller must fulfill the terms of the options contract:

A long call exercise results in buying the underlying stock at the strike price.
A short call assignment results in selling the underlying stock at the strike price.
A long put exercise results in selling the underlying stock at the strike price.
A short put assignment results in buying the underlying stock at the strike price.

An option will likely be exercised if it's in the option owner's best interest to do so, meaning it's optimal to take or to close a position in the underlying security at the strike price rather than at the current market price. After the market close on expiration day, ITM options may be automatically exercised, whereas OTM options are not and typically expire worthless (often referred to as being "abandoned"). The table below spells it out.

If the underlying stock price is...
...higher than the strike price
...lower than the strike price
If the underlying stock price is... A long call is... -->
...higher than the strike price ...ITM and typically exercised -->
...lower than the strike price ...OTM and typically abandoned -->
If the underlying stock price is... A short call is... -->
...higher than the strike price ...ITM and typically assigned -->
If the underlying stock price is... A long put is... -->
...higher than the strike price ...OTM and typically abandoned -->
...lower than the strike price ...ITM and typically exercised -->
If the underlying stock price is... A short put is... -->
...lower than the strike price ...ITM and typically assigned -->

The guidelines in the table assume a position is held all the way through expiration. Of course, you typically don't need to do that. And in many cases, the usual strategy is to close out a position ahead of the expiration date. We'll revisit the close-or-hold decision in the next section and look at ways to do that. But assuming you do carry the options position until the end, there are a few things you need to consider:

Know your specs . Each standard equity options contract controls 100 shares of the underlying stock. That's pretty straightforward. Non-standard options may have different deliverables. Non-standard options can represent a different number of shares, shares of more than one company stock, or underlying shares and cash. Other products—such as index options or options on futures—have different contract specs.
Stock and options positions will match and close . Suppose you're long 300 shares of XYZ and short one ITM call that's assigned. Because the call is deliverable into 100 shares, you'll be left with 200 shares of XYZ if the option is assigned, plus the cash from selling 100 shares at the strike price.
It's automatic, for the most part . If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option. In such a case, it's possible that a short ITM position might not be assigned. For more, see the note below on pin risk 7 ?
You'd better have enough cash . If an option on XYZ is exercised or assigned and you are "uncovered" (you don't have an existing long or short position in the underlying security), a long or short position in the underlying stock will replace the options. A long call or short put will result in a long position in XYZ; a short call or long put will result in a short position in XYZ. For long stock positions, you need to have enough cash to cover the purchase or else you'll be issued a margin 8 call, which you must meet by adding funds to your account. But that timeline may be short, and the broker, at its discretion, has the right to liquidate positions in your account to meet a margin call 9 . If exercise or assignment involves taking a short stock position, you need a margin account and sufficient funds in the account to cover the margin requirement.
Short equity positions are risky business . An uncovered short call or long put, if assigned or exercised, will result in a short stock position. If you're short a stock, you have potentially unlimited risk because there's theoretically no limit to the potential price increase of the underlying stock. There's also no guarantee the brokerage firm can continue to maintain that short position for an unlimited time period. So, if you're a newbie, it's generally inadvisable to carry an options position into expiration if there's a chance you might end up with a short stock position.

A note on pin risk : It's not common, but occasionally a stock settles right on a strike price at expiration. So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next business day.

But it goes beyond the exact price issue. What if an option is ITM as of the market close, but news comes out after the close (but before the exercise decision deadline) that sends the stock price up or down through the strike price? Remember: The owner of the option could submit a DNE request.

The uncertainty and potential exposure when a stock price and the strike price are the same at expiration is called pin risk. The best way to avoid it is to close the position before expiration.

The decision tree: How to approach expiration

As expiration approaches, you have three choices. Depending on the circumstances—and your objectives and risk tolerance—any of these might be the best decision for you.

1. Let the chips fall where they may. Some positions may not require as much maintenance. An options position that's deeply OTM will likely go away on its own, but occasionally an option that's been left for dead springs back to life. If it's a long option, the unexpected turn of events might feel like a windfall; if it's a short option that could've been closed out for a penny or two, you might be kicking yourself for not doing so.

Conversely, you might have a covered call (a short call against long stock), and the strike price was your exit target. For example, if you bought XYZ at $100 and sold the 110-strike call against it, and XYZ rallies to $113, you might be content selling the stock at the $110 strike price to monetize the $10 profit (plus the premium you took in when you sold the call but minus any transaction fees). In that case, you can let assignment happen. But remember, assignment is likely in this scenario, but it is not guaranteed.

2. Close it out . If you've met your objectives for a trade, then it might be time to close it out. Otherwise, you might be exposed to risks that aren't commensurate with any added return potential (like the short option that could've been closed out for next to nothing, then suddenly came back into play). Keep in mind, there is no guarantee that there will be an active market for an options contract, so it is possible to end up stuck and unable to close an options position.

The close-it-out category also includes ITM options that could result in an unwanted long or short stock position or the calling away of a stock you didn't want to part with. And remember to watch the dividend calendar. If you're short a call option near the ex-dividend date of a stock, the position might be a candidate for early exercise. If so, you may want to consider getting out of the option position well in advance—perhaps a week or more.

3. Roll it to something else . Rolling, which is essentially two trades executed as a spread, is the third choice. One leg closes out the existing option; the other leg initiates a new position. For example, suppose you're short a covered call on XYZ at the July 105 strike, the stock is at $103, and the call's about to expire. You could attempt to roll it to the August 105 strike. Or, if your strategy is to sell a call that's $5 OTM, you might roll to the August 108 call. Keep in mind that rolling strategies include multiple contract fees, which may impact any potential return.

The bottom line on options expiration

You don't enter an intersection and then check to see if it's clear. You don't jump out of an airplane and then test the rip cord. So do yourself a favor. Get comfortable with the mechanics of options expiration before making your first trade.

1 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price. For calls, it's any strike lower than the price of the underlying equity. For puts, it's any strike that's higher.

2 Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.

3 An options contract gives the owner the right but not the obligation to buy (in the case of a call) or sell (in the case of a put) the underlying security at the strike price, on or before the option's expiration date. When the owner claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option.

4 Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock. For every option trade there is a buyer and a seller; in other words, for anyone short an option, there is someone out there on the long side who could exercise.

5 A call option gives the owner the right, but not the obligation, to buy shares of stock or other underlying asset at the options contract's strike price within a specific time period. The seller of the call is obligated to deliver, or sell, the underlying stock at the strike price if the owner of the call exercises the option.

6 Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the options contract's strike price within a specific time period. The put seller is obligated to purchase the underlying security at the strike price if the owner of the put exercises the option.

7 When the stock settles right at the strike price at expiration.

8 Margin is borrowed money that's used to buy stocks or other securities. In margin trading, a brokerage firm lends an account owner a portion of the purchase price (typically 30% to 50% of the total price). The loan in the margin account is collateralized by the stock, and if the value of the stock drops below a certain level, the owner will be asked to deposit marginable securities and/or cash into the account or to sell/close out security positions in the account.

9 A margin call is issued when your 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 a customer exceeds their buying power. Margin calls may be met by depositing funds, selling stock, or depositing securities. Charles Schwab may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in the interests of both parties.

Just getting started with options?

Today's Options Market Update

Weekly Trader's Outlook

Trading Iron Condors Around Earnings | Tradecraft

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

What Is SteadyOptions?

12 Years CAGR of 122.7%

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Featured Articles

Useful resources, recent articles, what are covered calls and how do they work.

A covered call is an options trading strategy where an investor holds a long position in an asset (most usually an equity) and sells call options on that same asset. This strategy can generate additional income from the premium received for selling the call options.

By Kim, Saturday at 02:37 AM

Added by Kim
Saturday at 02:37 AM

SPX Options vs. SPY Options: Which Should I Trade?

Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

By Mark Wolfinger, March 15

1,493 views

Added by Mark Wolfinger

Yes, We Are Playing Not to Lose!

There are many trading quotes from different traders/investors, but this one is one of my favorites: “ In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

By Kim, March 11

1,803 views

The Impact of Implied Volatility (IV) on Popular Options Trades

You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt). However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.

By Yowster, March 7

2,360 views

Added by Yowster

Please Follow Me Inside The Insiders

The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

By TrustyJules, March 5

1,253 views

Added by TrustyJules

Trading Earnings With Ratio Spread

A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

By TrustyJules, February 22

2,288 views
February 22

SteadyOptions 2023 - Year In Review

2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023.

By Kim, January 5

6,817 views

Call And Put Backspreads Options Strategies

A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

By Chris Young, October 14, 2023

10,376 views

Added by Chris Young
October 14, 2023

Long Put Option Strategy

A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

By Chris Young, October 11, 2023

12,008 views
October 11, 2023

Long Call Option Strategy

A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

By Chris Young, October 8, 2023

12,458 views
October 8, 2023

We want to hear from you!

There are no comments to display.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Already have an account? Sign in here.

Existing user? Sign In
Education Center
Members Reviews
SteadyOptions Strategy
Anchor Trades Strategy
Simple Spreads Strategy
Steady Collars Strategy
SteadyVol Strategy
SteadyYields Strategy
Managed Accounts
Performance

We couldn’t find any results matching your search.

Please try using other words for your search or explore other sections of the website for relevant information.

We’re sorry, we are currently experiencing some issues, please try again later.

Our team is working diligently to resolve the issue. Thank you for your patience and understanding.

News & Insights

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.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.

To add symbols:

Type a symbol or company name. When the symbol you want to add appears, add it to My Quotes by selecting it and pressing Enter/Return.
Copy and paste multiple symbols separated by spaces.

These symbols will be available throughout the site during your session.

Your symbols have been updated

Edit watchlist.

Type a symbol or company name. When the symbol you want to add appears, add it to Watchlist by selecting it and pressing Enter/Return.

Opt in to Smart Portfolio

Smart Portfolio is supported by our partner TipRanks. By connecting my portfolio to TipRanks Smart Portfolio I agree to their Terms of Use .

Trade Options With Me

For Your Financial Freedom

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

Privacy Overview

Want to Become a Better Trader Today?

Search Search Please fill out this field.
Options and Derivatives
Advanced Concepts

Trading OEX Options: The Risk of Early Exercise

A popular strategy among options investors is covered call writing: the investor buys 100 shares of stock and sells one call option , granting someone else the right to buy that stock at a specific price, known as the strike price , for a limited time. Often, the option expires worthless and the investor keeps both the stock and the option premium.

However, sometimes the option owner exercises the option. That means the investor is assigned an exercise notice and is obligated to sell the stock. This achieves the maximum profit available when writing covered calls.

Many investors fear being assigned that exercise notice. They may believe someone has cheated them because the stock is trading above the strike price. In fact, being assigned early can benefit option investors, except in one case: OEX options. OEX, which trades on the Chicago Board Options Exchange (CBOE), is the ticker symbol used to identify Standard & Poor's 100 index options.

OEX options get their name from the ticker symbol of the Standard & Poor's 100 stock index.
OEX options have a particular risk to the investor if they are assigned early.
The risk can be mitigated by the investor.

How an Early Exercise Works

Here's the hard truth: Being assigned an exercise notice is nothing more than a notification that you fulfilled the obligation you previously accepted when selling the option contract. If you own stock that you don't want to sell under any circumstances, then you shouldn't be writing covered calls.

If you trade spreads (buy one option and sell another), then being assigned an exercise notice does not adversely affect your overall position. You lose nothing.

In fact, assuming your account has sufficient margin to carry the position, receiving an assignment notice before expiration can turn into free money on occasion because of the additional profit potential. In other words, if the stock suddenly drops below the strike price, every penny of that decline below the strike is extra cash in your pocket - cash that you couldn't earn if you were short the call instead of stock.

The OEX Exception

The above is a rather lengthy explanation of why being assigned an exercise notice should (almost) never be a concern. As mentioned above, there is one important exception, and that occurs when you sell OEX options.

These options are cash-settled , American-style options. All other actively traded index options are European-style and cannot be exercised prior to expiration.

Why is OEX an exception? And what's the big deal about being assigned an exercise notice before expiration arrives anyway? Didn't we just learn that an investor shouldn't fear early assignment?

When using equity options, if you are assigned on a call, the option is canceled and, instead, you become short 100 shares of stock (or you lose 100 shares of stock that you own). As such, your upside risk is unchanged, but your potential downside profit is increased.

Everything changes, however, when you are assigned early and the option is cash-settled. Let's take a look at why this happens:

When assigned on a cash-settled OEX option, you are obligated to repurchase the option at last night's intrinsic value . (We'll take a look at how this works in the example below.)
You don't learn that you have been assigned until the following morning before the market opens for trading.
Your position changes. You are no longer short the option because you were forced to buy it—with no advance notice.
When trading equity options, the call option you were short is replaced with short stock. Upon assignment, a short put position is replaced with long stock. But, when assigned on a cash-settled option, the option position is canceled and there is no replacement.
This assignment notice often occurs as a surprise to the option rookie, who not only doesn't understand why anyone would exercise the option before expiration, but also probably doesn't know that early exercise is possible.

Protecting Yourself From Early Exercise

Here's how you can avoid this OEX options pitfall.

Example 1: Losses on an OEX Put Spread

Let's say you decide to take a bullish position and sell an OEX put spread (which makes money when OEX remains above the strike price of the option sold). Assume OEX is currently 560.

Example 2: The Effects of an Exercise Notice

Let's consider a different scenario. Let's assume that late one afternoon, about two weeks prior to June expiration, OEX is trading at 500. That's not good because there's a high probability that both options will be in the money when expiration arrives, forcing you to take the maximum loss.

But there's hope! About two minutes after the stock market closes for trading (index options continue trading for another 15 minutes), the U.S. Federal Reserve unexpectedly announces an interest rate cut of 50 basis points (0.5%).

The announcement takes everyone by surprise. Stocks have stopped trading for the day on the NYSE, but after-hours trading is taking place and stock prices are higher. Stock index futures soar, indicating that the market is expected to open much higher tomorrow.

The OEX calls increase in price as everyone wants to buy. Similarly, puts are offered at lower prices. The bid/ask prices for the options change, but the OEX has an official closing price of $540. The index price ignores after-hours trading.

The OEX Jun 540 puts (your short option) was $40 before the news, but now the bid has dropped to $28. No one will sell that option at that price.

Why? Anyone who owns the put can exercise it and receive the option's intrinsic value (strike price minus OEX price), or $40.

When you get home from work and hear the news about interest rates, you are elated. What a lucky break for you! If the rally continues and OEX moves above 540, you will earn a profit from this position.

The Next Day…

You eagerly open your computer the following morning. Sure enough, the DJIA futures are 250 points higher. But, when you look at your online brokerage account you notice something unusual. Your OEX position shows that you are long 10 Jun OEX 530 puts, but there is no position in the Jun 540 puts. You don't understand and immediately call your broker.

The customer service rep tells you to look at your transactions for yesterday. You know you didn't make any trades, but there it is—right in front of you: You bought 10 Jun OEX 540 puts @ $40.

You carefully explain that there must be some mistake because you didn't make the trade. That's when the rep tells you that you were assigned an exercise notice that obligated you to repurchase those options at last night's intrinsic value. With the OEX closing price of 500, you must pay $40 for each option. The customer service rep tells you they're sorry but nothing can be done and asks why you failed to exercise your Jun 530 puts when the news was released. But perhaps you didn't know you could do that.

Your spread is gone. All you have left is 10 Jun OEX 530 puts. When the market opens and OEX is 515. There's no reason to gamble by holding the puts, so you unhappily sell the OEX Jun 530 puts, collecting $15 for each. You thought your maximum loss for the trade was $750 per spread, but you paid $25 to close the spread (pay 40, sell at 15) and thus lost $2,250 per spread ($2,500 to close the position minus the amount you collected for the spread at the beginning, which in this case was $250 per spread), or $22,500 when you account for the entire position of ten contracts. Ouch!

It's too late to do anything in the imaginary scenario above, but now that you understand the problem, there are two good alternatives:

Don't sell OEX options.
Trade one of the other indexes that are cash-settled, European style.

In these cases, you cannot be assigned an exercise notice prior to expiration and this unhappy event won't ever happen to you.

Cboe. " OEX Options Product Specifications ."

Terms of Service
Editorial Policy
Privacy Policy
Your Privacy Choices

Skip to main content
Skip to primary sidebar

Additional menu

Options With Davis

Options Made Easy For Everyone

Short Put Assignment – How To Avoid It & What To Do If Assigned

posted on April 28, 2023

You probably sold a Put Option thinking the market would go up.

But now your Short Put is In-the-Money (ITM) and you’re either in danger of getting assigned, or you may have already been assigned the shares.

If you’ve already been assigned, you may be panicking now.

That’s because the unexpected assignment of the shares made your cash balance negative and you could be in danger of a margin call.

In both cases what do you do?

How do you avoid getting assigned if your Short Put is now ITM?

What do you do if you’re already been assigned the shares?

And what do you do if you get a margin call?

What To Do If You Get A Margin Call?

So the most urgent matter to address is if you get a margin call.

If you get a margin call, you want to deal with it immediately.

That’s because if you don’t do anything, your broker can liquidate your positions to meet their margin requirement.

That could mean closing out other positions other than your Short Put position.

So if you have multiple positions, the broker could randomly close positions in your account.

At this point, you have two choices.

The first choice is to add more funds to meet the margin requirement.

The second choice is to close out positions on your own to meet the margin requirement.

According to FINRA (Financial Industry Regulatory Authority), you have two to five days to meet the call:

That should be more than enough time to transfer funds into your account (if you still have more funds), or to close out positions in your account to meet the margin call.

What To Do If Your Short Put Is Assigned

If your Short Put is already assigned, that means you’re now Long 100 shares per Put Option.

In this case, to reverse the assignment and reinstate your original Short Put position, you need to do two things:

Sell the shares.
Sell a Put at the same strike but with a longer DTE.

And you do these two things simultaneously in a single order ticket:

By doing it in a single ticket, you do not have any spreading risk because they will move in tandem.

So when you do this, you will reinstate the same Short Put strike but with a longer DTE.

With a longer DTE, there will be more extrinsic value in your Option, which reduces the chances of getting an early assignment.

When You’re In Danger of Early Assignment

The next thing to know is exactly when you’re in danger of getting assigned.

It doesn’t mean that if your Put is ITM, you’d automatically be assigned.

In fact, it’s very rare to get assigned.

The only time you’re likely to get assigned is if the following happens:

Short Put is ITM.
And extrinsic value is very little.
And very few DTE (days to expiration).

The biggest factor that determines whether you have a likelihood of getting assigned is if your extrinsic value is very little.

That’s because when the extrinsic value of the Put is very little, it may not benefit the Put buyer to hold on to the Option.

But as long as there’s still a decent amount of extrinsic value left, you’re unlikely to get assigned even if your Put is ITM.

Understanding The Mindset of Put Buyers

To understand this a little better, we need to get into the mindset of Put buyers and see when they would likely exercise.

Let’s assume you sold a Put on AMZN at the strike price of 120 for $2.00.

Now, let’s switch to the Put buyer’s perspective.

That would mean that the Put buyer bought a Put at the strike price of 120 for $2.00.

The next step is to understand why did this person buy a Put Option.

In general, there are two main reasons why someone would buy a Put Option:

To speculate a move to the downside (either as a single Option or part of a spread trade ).
To protect their Long stock position.

Next, we want to map out the different scenarios that can happen and see if the Put buyer would actually exercise their Option in each of the scenarios.

Scenario 1: The stock drops to $115.

Let’s say the stock drops to $115 and the Put Option is now worth $6.00.

So that’s a $4.00 increase in the Put’s value.

Of the $6.00, the value is divided into intrinsic value and extrinsic value:

Intrinsic value = $5.00
Extrinsic value = $1.00

When the Put buyer bought the Put, it was just $2.00 of extrinsic value (no intrinsic value because it’s OTM).

After the stock dropped to $115, it gained $5.00 of intrinsic value and lost $1.00 extrinsic value.

Here’s a question for you:

If you were the Put buyer, would you exercise your Put Option?

To know the answer, we want to compare the two choices a Put buyer has at this point.

The first choice is to exercise the Put Option.

By exercising, the Put buyer would either be Short 100 shares at $120, or if the Put buyer already has 100 shares of the stock it would be sold away at $120.

In both cases, when exercising, the Put buyer immediately forfeits the extrinsic value of $1.00.

So if he became Short 100 shares at $120 and immediately sold at $115, his profit would be $5 per share minus the $2 he paid for the Put, which equals $3 profit per share.

If he initially already had 100 shares of the stock, he would be saving $3 loss per share.

The second choice is to just sell off the Put Option.

By selling the Put Option, the Put buyer would have made $4 (bought for $2 and sold for $6).

So in this scenario, it would make more sense for the Put buyer to simply sell off his Put Option than to exercise it.

Scenario 2: The stock drops to $105 with 30 DTE.

In this scenario, the stock has dropped significantly but there’s still 30 DTE left in the Put Option.

The value of the Put has now ballooned to $15.05:

Intrinsic Value = $15.00
Extrinsic Value = $0.05

The Put is now deep ITM and there’s very little extrinsic value left.

However, there are still 30 DTE left in the Put Option.

If you were the Put buyer, would you exercise the Put?

In this scenario, it still is unlikely that you’d get assigned because there are still many days left to the Put’s expiration.

If the Put buyer anticipates the stock to fall further, it still makes sense to hold on to the Put until it’s closer to expiration before making a decision to exercise or not.

And if he exercises it, he will forfeit the $0.05 in extrinsic value (which is an additional $5 in profit).

Furthermore, exercising can incur further charges.

So in general, Put buyers would rather just sell off the Put than exercise it.

Scenario 3: The stock drops to $105 with 7 DTE.

In this scenario, the stock also drops to $105 but there’s 7 DTE left.

The value of the Put is now $15.01:

Extrinsic Value = $0.01

In this case, if you were the Put buyer, would it make sense for you to exercise the Option?

The answer is yes.

That’s because there are not that many days left to the Put’s expiration.

And there’s pretty much no extrinsic value left.

So if your Put doesn’t have much extrinsic value left and there are not many days left to expiration, then it’s highly likely you’d get assigned.

So how do you avoid early assignments?

How To Avoid Early Assignment

The best way to avoid any early assignments is by simply rolling your Short Put .

There are two ways to do this:

Defensive Method: This method is to proactively roll your Short Put out & down the moment it gets breached to avoid getting ITM. This way you will always keep the delta below 50 so there’s no chance of an early assignment.
21 DTE Method: Since we already know that it’s unlikely for an Option to be exercised when there’s still more than 21 DTE left, we only look to roll around the 21 DTE mark. Oftentimes, the Put could be ITM before the 21 DTE mark but is OTM by the time it’s 21 DTE. So if at 21 DTE the Put is ITM, we roll. If it’s OTM, we do nothing and let Theta do its work.

When you use these two methods, the chances of getting assigned on your Short Put get reduced significantly.

Reader Interactions

January 5, 2024 at 3:37 AM

so if you’re somewhere in the middle ie your neutral on the stock. and the put you sold had a strike of 145 and the stock is say 142 what about taking ownership of the stock at the 142 and selling say a 144 call for 3$ getting it called away and then start over selling puts ?

MODULE 9 – HOW TO DEAL WITH EARLY ASSIGNMENT

First it is important to note that early Assignment is only an issue for American style options.

If you are trading Iron Condors on the indexes (RUT, SPX, NDX and MNX), you do not even need to worry about early assignment.

These are European Options and are cash settled. Contrastingly for ETF’s (IWM, SPY and QQQ) and single stock options there is a risk of early assignment.

Despite this in this module we will explain the risk of early assignment is almost inconsequential.

In fact, assignment when it happens can be an exceptionally good thing.

The reason why American options are almost never exercised before expiration is to do with the characteristics of an option itself.

An option has two sources of value, intrinsic and extrinsic value. Intrinsic value is the value of the option if it is exercised today, extrinsic value is the time value of the option.

The important thing about an option is that the extrinsic or time value must be equal or greater than 0.

Thus, exercising options voluntarily removes the extrinsic value for the buyer.

There are few reasons options are exercised before expiration because of this.

Generally, options could potentially be exercised early when they are deep ITM and have almost no extrinsic value left.

This can sometimes happen with dividends if an investor would prefer to exercise and receive the dividend as opposed to continue to hold the call on a deep ITM option.

Another reason might be if a large institution had an exceptionally large position, it might be cheaper to exercise early than to sell the position in the options market and pay the bid / ask spread on a less liquid underlying.

A deep ITM option can sometimes also be exercised if the borrowing rate becomes attractive.

All these are rare and even more rare is an option exercised with a lot of extrinsic value left. If this happens you won the lottery.

Despite this, depending how margin is calculated at your brokerage you may be left with a margin call.

In this case simply sell or buy back the assigned shares and sell back the other leg of the option.

The other main assignment risk, which happens more often occurs on expiration day.

This occurs when a options short leg is exactly At The Money. In this case it can become unclear whether assignment will occur.

As American Options trade after hours on Friday this can sometimes lead to some surprise assignments come Monday morning.

In this case the best way to avoid the risk of assignment is to simply close out the position on the day of expiry.

Traders that want to learn more about options assignment and exercise, should read this article.

In the 10th and final Module in the iron condor course, we will be looking at whether we should trade iron condors on indexes or ETF’s.

Help Center & Support

How can we help you today, why would a short option be assigned early.

A short option can be assigned at any time because the long option holder has the right to exercise whenever they want. However, there are three primary situations where it is much more likely that you could be assigned early.

A long call holder might exercise their call before the ex-dividend date so that they can collect the dividend. For a detailed explanation of dividend risk, please click here .

Hard-to-borrow (HTB) fees

Certain stocks have hard-to-borrow (HTB) fees. This means that anyone who needs to borrow shares to sell the stock short needs to pay an additional fee. Conversely, anyone who is long the stock could potentially lend their shares out and receive money for doing so. As a result, if you are short calls in a hard-to-borrow stock, then there is a higher possibility of being assigned early because it may be more beneficial for the long call holder to exercise and lend out the shares. In this case, you will be short the stock, and you will have to pay the hard-to-borrow fees. To learn more about hard-to-borrow fees, please click here .

Any deep-in-the-money put is at risk of early assignment. This is because it may be better for a long put holder to exercise their put and sell the stock so they can collect interest on the proceeds from the short sale. If you need to borrow money for the stock purchased from an assignment, you will have to pay interest on those funds.

Acceptable Documents for Domestic Accounts
Pattern Day Trading Rules (PDT)
Trade Confirmations and Account Statements
Pre-Market And After-Hours Orders (Extended Hours)
International Account Funding Methods
How to Withdraw from an International Account
Supported Countries for International Accounts
Futures Holiday Trading Schedule
CME Outright Futures Contracts (Specifications)
Accessing the tastytrade Platform

Early horses list and odds for the 2024 Preakness Stakes

In the 2024 Kentucky Derby , Mystik Dan defied the odds and emerged victorious by a nose in a heart-stopping photo finish. This triumph has positioned Mystik Dan as the frontrunner for the upcoming Preakness Stakes, the second leg of the prestigious Triple Crown .

The Preakness Stakes , a race steeped in history and tradition, is set to take place on May 18 at the iconic Pimlico Race Course in Baltimore. The draw for this momentous event is scheduled for May 13, marking a crucial step for the preparation in the journey towards the title.

Looking back at the previous year's Preakness Stakes, it was a memorable victory for National Treasure's jockey John Velazquez, who jockeyed Fierceness in the 2024 Kentucky Derby. Despite entering the race with 3-1 odds, National Treasure defied expectations and claimed his first Preakness Stakes victory, a testament to the unpredictable nature of this event.

With just over a week to go, the anticipation for the 2024 Preakness Stakes is building. Here are the early odds for the race, adding to the excitement around this prestigious event.

Horse racing: Sierra Leone jockey Tyler Gaffalione could face discipline for Kentucky Derby ride

2024 Preakness Stakes horses and early odds

Early odds for potential horses ahead of the draw listed below via CBS Sports:

Horse: Muth | Early odds: 10-11
Horse: Mystik Dan | Early odds: 3-1
Horse: Tuscan Gold | Early odds: 5-1
Horse: Imagination | Early odds: 5-1
Horse: Just Steel | Early odds: 10-1
Horse: Seize the Gray | Early odds: 10-1
Horse: Copper Tax | Early odds: 16-1
Horse: Uncle Heavy | Early odds: 20-1
Horse: Informed Patriot | Early odds: 20-1
Horse: Mugatu | Early odds: 33-1

Preakness Stakes 2024: TV, streaming and where to watch

When: Saturday, May 18
Coverage starts : 10:30 a.m. ET
Post time: 6:50 p.m. ET
Where: Pimlico Race Course, Baltimore, Maryland
Cable TV: NBC
Streaming: Peacock ; YouTube TV; fuboTV

How to watch: Watch the 2024 Kentucky Derby with a Peacock subscription

We occasionally recommend interesting products and services. If you make a purchase by clicking one of the links, we may earn an affiliate fee. USA TODAY Network newsrooms operate independently, and this doesn’t influence our coverage.

Gannett may earn revenue from sports betting operators for audience referrals to betting services. Sports betting operators have no influence over nor are any such revenues in any way dependent on or linked to the newsrooms or news coverage. Terms apply, see operator site for Terms and Conditions. If you or someone you know has a gambling problem, help is available. Call the National Council on Problem Gambling 24/7 at 1-800-GAMBLER (NJ, OH), 1-800-522-4700 (CO), 1-800-BETS-OFF (IA), 1-800-9-WITH-IT (IN). Must be 21 or older to gamble. Sports betting and gambling are not legal in all locations. Be sure to comply with laws applicable where you reside.

Follow Bucs Dugout online:

Follow Bucs Dugout on Twitter
Follow Bucs Dugout on Facebook

Filed under:

Did the Pirates give up on Roansy Contreras too early?

Contreras was traded to the Angels on Thursday after being designated for assignment.

Share this story

Share this on Facebook
Share this on Twitter
Share this on Reddit
Share All sharing options

Share All sharing options for: Did the Pirates give up on Roansy Contreras too early?

The days of celebrating a “Roansy Day” have gone by the waste side and all but evaporated in baseball. Pittsburgh Pirates right-handed starter/reliever Roansy Contreras is now a former Pirate.

Pittsburgh designated Contreras for assignment to make room for Paul Skenes on the 40-man and 26-man rosters last Saturday. The Pirates could have designated lefty relief pitcher Josh Fleming, which they did following two disastrous innings against Chicago and Milwaukee, or placed catcher Jason Delay on the 60-day IL. Instead, the Pirates organization opted to move on from Contreras. He was traded to the L.A. Angels on Thursday.

Once a must-watch pitcher and a shining star in the rotation during the 2022 season, Contreras fell on hard times the past two seasons. In 21 games (18 starts) during his first full season, Contreras delivered a 3.79 ERA, 1.27 WHIP, and .225 opposing batting average in 95 innings with 86 strikeouts. He frequently reached 96-97-98 mph and was the best starter every five days in Derek Shelton’s rotation.

His average velocity dipped from 95.6 mph to 94.3 mph last season and 94.5 mph in 12 appearances this season. In 2023, Contreras pitched to a 6.59 ERA through 68.1 innings in 19 games (11 starts) and moved to the bullpen in June. He didn’t pitch following July 5 after allowing seven runs over 3.1 July innings.

Contreras moved to the bullpen full-time this year and allowed eight earned runs with a .292 opponent average and 1.65 WHIP over 16.1 innings. He was mainly used in a mop-up role after floundering in high to middle-of-the-pack leverage roles.

Only 24, Contreras has the stuff to be a solid MLB pitcher. The Pirates couldn’t figure out how to fix Tyler Glasnow’s struggles between Triple-A and the Majors. They traded Charlie Morton during the 2013-2015 playoff runs. Clay Holmes turned into a revolutionary arm who the Pirates knew had talent but didn’t take enough time to try and develop before becoming the Yankees closer. Gerrit Cole was more of a money thing. Jameson Taillon pitched better once he left but had a second arm surgery.

Contreras is going to figure it out somewhere. I don’t think he’ll become an All-Star like many of these former Pirates, but the talent is too immense to give up on this quickly. It makes me wonder if things have been transpiring behind the scenes where the Pirates lost hope in their young righty acquired in the Taillon deal.

His slider was his best offering in 2023 and was hit at a .227 average, but went through the roof to .600 and only threw it 23 times. Contreras should deploy his sweeper more (.118 average) and threw it 26.5 percent so far this year. His slider usage dropped from 43.5 percent to 9.3 percent. Opponents are hitting .361 against his four-seamer and the Pirates never unlocked or fixed what ailed Conteras since 2022. Walks have also become a problem with eight this year and a career-worst 1.65 WHIP.

It might have fallen on deaf ears, but Contreras has the ability to pitch in the Majors at a high level. Mitch Keller took four years to become what the Pirates truly believed he could be and was given every opportunity to succeed. A tough stint in the bullpen proved to be a blessing with his sweeper and sinker usage saving his career and earning Keller the biggest contract signed by a Pirates pitcher in team history.

There’s no denying Contreras was awful last season and parts of this year. Maybe its because Keller was a first-rounder, but that didn’t stop the Pirates from quickly moving on from Cole Tucker and Will Craig, although they both looked overmatched. The tools are still there, plus he’s only 24 years old. Contreras might become the next Morton, Holmes, or other pitchers who succeed with a change of scenery and more time to figure out how to become himself again.

Loading comments...

We've detected unusual activity from your computer network

To continue, please click the box below to let us know you're not a robot.

Why did this happen?

Please make sure your browser supports JavaScript and cookies and that you are not blocking them from loading. For more information you can review our Terms of Service and Cookie Policy .

For inquiries related to this message please contact our support team and provide the reference ID below.

Great, you have saved this article to you My Learn Profile page.

Clicking a link will open a new window.

4 things you may not know about 529 plans

Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some juristictions to falsely identify yourself in an email. All information you provide will be used solely for the purpose of sending the email on your behalf. The subject line of the email you send will be “Fidelity.com”.

Thanks for you sent email.

Short calendar spread with puts

Potential goals.

To profit from a large stock price move away from the strike price of the calendar spread with limited risk if there is little or no price change.

Explanation

A short calendar spread with puts is created by selling one “longer-term” put and buying one “shorter-term” put with the same strike price. In the example a two-month (56 days to expiration) 100 Put is sold and a one-month (28 days to expiration) 100 Put is purchased. This strategy is established for a net credit (net receipt), and both the profit potential and risk are limited. The maximum profit is realized if the stock price is far above or far below to the strike price on the expiration date of the long put, and the maximum risk is realized if the stock price is at the strike price.

Example of short calendar spread with puts

Maximum profit.

The maximum profit potential of a short calendar spread with puts is the net credit received less commissions. This profit is realized if the stock price is either far above or far below the strike price of the calendar spread at expiration of the long put. Whether the stock price rises or falls, if it moves sharply away from the strike price, then the difference between the two puts approaches zero and the full amount received for the spread is kept as income. For example, if the stock price falls sharply so that both puts are deep in the money, then the prices of both puts approach parity for a net difference of zero. If the stock price rises sharply so that both puts are far out of the money, then the price of both puts approach zero for a net difference of zero.

Maximum risk

The potential maximum risk of a short calendar spread with puts is substantial if the long put expires worthless and short put (with a later expiration date) remains open. It is therefore essential to monitor a short calendar spread position as the expiration date of the long put approaches.

Assuming that the long put is open, the maximum risk of a short calendar spread with puts occurs if the stock price equals the strike price of the puts on the expiration date of the long put (shorter term). This is the point of maximum loss, because the short put (longer term) has maximum time value when the stock price equals the strike price. Also, since the long put expires worthless when the stock price equals the strike price at expiration, the difference in price between the two puts is at its greatest.

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

Breakeven stock price at expiration of the long put

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 long put at which the time value of the short put equals the original price of the calendar spread. However, since the time value of the short put 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: short calendar spread with puts

*Profit or loss of the short put is based on its estimated value on the expiration date of the long put. 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 short calendar spread with puts realizes its maximum profit if the stock price is either far above or far below the strike price on the expiration date of the long put. The ideal forecast, therefore, is for a “big stock price change when the direction of the change could be either up or down.” In the language of options, this is known as “high volatility.”

Strategy discussion

A short calendar spread with puts is a possible strategy choice when the forecast is for a big stock price change but the direction of the change is uncertain. Short calendar spreads with puts are often established before earnings reports, before new product introductions and before FDA announcements. These are typical of situations in which “good news” could send a stock price sharply higher, or “bad news” could send a stock price sharply lower. The risk is that the announcement does not cause a significant change in stock price and, as a result, the price of the short calendar spread increases and a loss is incurred.

It is important to remember that the prices of options – and therefore the prices of calendar spreads – contain the consensus opinion of options market participants as to how much the stock price will move prior to expiration. This means that sellers of calendar spreads believe that the market consensus is “too low” and that the stock price will move beyond a breakeven point – either up or down.

The same logic applies to options prices before earnings reports and other such announcements. Dates of announcements of important information are generally publicized in advanced and are well-known in the marketplace. Furthermore, such announcements are likely, but not guaranteed, to cause the stock price to change dramatically. As a result, prices of calls, puts and calendar spreads adjust prior to such announcements. In the language of options, this is known as an “increase in implied volatility.”

An increase in implied volatility increases the risk of trading options. For sellers of calendar spreads, higher implied volatility means that breakeven points are farther apart and that the underlying stock price has to move further to achieve breakeven.

“Selling a calendar spread” is intuitively appealing, because “you can make money if the stock price rises or falls.” The reality is that the market is often “efficient,” which means that prices of calendar spreads frequently are an accurate gauge of how much a stock price is likely to move prior to expiration. This means that selling a calendar spread, like all trading decisions, is subjective and requires good timing for both the position entry decision and the exit decision.

Impact of stock price change

“Delta” estimates how much a position will change in price as the stock price changes. Long puts have negative deltas, and short puts have positive deltas. The net delta of a short calendar spread with puts 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 put, 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 put, 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 short put is approximately +0.50 and the delta of the long put approaches −1.00.

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

The position delta approaches 0.00 if the puts are deep in the money (stock price below strike price) or far out of the money (stock price above strike price). If the puts are deep in the money, then the delta of the short put approaches +1.00 and the delta of the long put approaches −1.00 for a net spread delta of 0.00. If the puts are out of the money, then the deltas of both puts 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 short calendar spread with puts has one short put with more time to expiration and one long put with the same strike price and less time, the impact of changing volatility is slightly negative, but very close to zero. The net vega is slightly negative, because the vega of the short put is slightly greater than the vega of the long put. As expiration approaches, the net vega of the spread approaches the vega of the short put, because the vega of the long put 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 short calendar spread with puts has one short put with more time to expiration and one long put with the same strike price and less time, the impact of time erosion is negative if the stock price is near the strike price of the puts. In the language of options, this is a “net negative theta.” Furthermore, the negative impact of time erosion increases as expiration approaches, because the value of the short-term long at-the-money put 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 slightly positive. In either of these cases, the time value of the shorter-term long put approaches zero, but the time value of the longer-term short put 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 put in a short calendar spread with puts has no risk of early assignment, the short put does have such risk. Early assignment of stock options is generally related to dividends, and short puts that are assigned early are generally assigned on the ex-dividend date. In-the-money puts whose time value is less than the dividend have a high likelihood of being assigned.

If assignment is deemed likely and if a long 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 put to close and buying the short put to close. Alternatively, the short put can be purchased to close and the long put can be kept open.

If early assignment of the short put does occur, stock is purchased, and a long stock position is created. If a long stock position is not wanted, there are two choices. First, the long stock can be sold by exercising the long put. Second, shares can be sold in the marketplace and the long put can be left open. Generally, if there is time value in the long put, then it is preferable to sell the shares and sell the long put rather than exercise it. It is preferable to sell shares in this case, because the time value will be lost if the long put is exercised. Also, generally, if the longer-term short put in a short calendar spread is assigned early, then there is little or no time value in the shorter-term long put. In this case it is usually preferable to sell the unwanted long shares by exercising the long put. Such action then closes the entire position and frees up capital for other uses.

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

Potential position created at expiration of the short put

If the short put is assigned after the long put expires, then stock is purchased and a straight long stock position is created and the potential risk is substantial.

However, if the short put is assigned prior to expiration of the long put, then stock is purchased and the result is a two-part position consisting of long stock and long put. This position has limited risk on the downside and substantial profit potential on the upside. If a trader has a bullish forecast, then this position can be maintained in hopes that the forecast will be realized and a profit earned. If the long stock position is not wanted, then the position must be closed either by exercising the put or by sell stock and selling the put (see Risk of Early Assignment above).

Other considerations

Short calendar spreads with puts are frequently compared to long straddles and long strangles, because all three strategies profit from “high volatility” in the underlying stock. The differences between the three strategies are the initial cost, the risk and the profit potential. In dollar terms, straddles and strangles cost much more to establish, have greater, albeit limited, risk and have unlimited profit potential. Short calendar spreads, in contrast, require less capital (margin requirement) to establish, have a smaller limited risk and have limited profit potential. One should not conclude, however, that traders with limited capital should prefer short calendar spreads to long straddles or long strangles. The risk of a short 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 short calendar spread is similar to choosing any strategy.

The short calendar spread with puts is also known by two other names, a “short time spread” and a “short horizontal spread.” “Short” in the strategy name implies that the strategy is established for a net credit, or net receipt of cash. 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.

Subscribe to Fidelity Viewpoints ®

Looking for more ideas and insights, thanks for subscribing.

Tell us the topics you want to learn more about
View content you've saved for later
Subscribe to our newsletters

We're on our way, but not quite there yet

Oh, hello again, thanks for subscribing to looking for more ideas and insights you might like these too:, looking for more ideas and insights you might like these too:, fidelity viewpoints ® timely news and insights from our pros on markets, investing, and personal finance. (debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. fidelity viewpoints ® timely news and insights from our pros on markets, investing, and personal finance. (debug tcm:2 ... decode crypto clarity on crypto every month. build your knowledge with education for all levels. fidelity smart money ℠ what the news means for your money, plus tips to help you spend, save, and invest. active investor our most advanced investment insights, strategies, and tools. insights from fidelity wealth management ℠ timely news, events, and wealth strategies from top fidelity thought leaders. women talk money real talk and helpful tips about money, investing, and careers. educational webinars and events free financial education from fidelity and other leading industry professionals. done add subscriptions no, thanks. advanced trading strategies trading options finding stock and sector ideas stocks investing for beginners using technical analysis article copyright 2013 by chicago board options exchange, inc (cboe). reprinted with permission from cboe. the statements and opinions expressed in this article are those of the author. fidelity investments cannot guarantee the accuracy or completeness of any statements or data. options trading entails significant risk and is not appropriate for all investors. certain complex options strategies carry additional risk. before trading options, please read characteristics and risks of standardized options . supporting documentation for any claims, if applicable, will be furnished upon request. greeks are mathematical calculations used to determine the effect of various factors on options. charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only. 684067.3.0 mutual funds etfs fixed income bonds cds options active trader pro investor centers stocks online trading annuities life insurance & long term care small business retirement plans 529 plans iras retirement products retirement planning charitable giving fidsafe , (opens in a new window) finra's brokercheck , (opens in a new window) health savings account stay connected.

News Releases
About Fidelity
International
Terms of Use
Accessibility
Contact Us , (Opens in a new window)
Disclosures , (Opens in a new window)

After blaming his 2020 loss on mail balloting, Trump tries to make GOP voters believe it’s OK now

At rallies and in social media posts, former President Donald Trump has been trying to assure Republican voters that casting ballots by mail and other forms of early voting are “all good options.”

Marta Moehring voted the way she prefers in Nebraska’s Republican primary Tuesday — in person, at her west Omaha polling place.

She didn’t even consider taking advantage of the state’s no-excuse mail-in ballot process. In fact, she would prefer to do away with mail-in voting altogether. She’s convinced fraudulent mailed ballots cost former President Donald Trump a second term in 2020 .

“I don’t trust it in general,” Moehring, 62, said. “I don’t think they’re counted correctly.”

But now Republican officials — even, sometimes, Trump — are encouraging voters such as Moehring to cast their ballots by mail. The GOP has launched an effort to, in the words of one official, “correct the narrative” on mail voting and get those who were turned off to it by Trump to reconsider for this year’s election.

The push is a striking change for a party that amplified dark rumors about mail ballots to explain away Trump's 2020 loss , but it is also seen as a necessary course correction for an election this year that is likely to be decided by razor-thin margins in a handful of swing states.

“We have to get right on using these mail-in ballots for the people who can’t get there on Election Day,” Rep. Scott Perry , one of Trump’s strongest congressional allies in his push to overturn the 2020 election, said at a conservative gathering in his home state of Pennsylvania.

Republicans once were at least as likely as Democrats to vote by mail, but Trump changed the dynamics in 2020 . He preemptively began to argue that mail balloting was bad months before voting began in the presidential race.

That alarmed GOP strategists who saw mail voting as an advantage in campaigns because it lets them “bank” unreliable votes before Election Day and lowers the risk of turnout plummeting because of bad weather or other unpredictable factors at the polls. Trump’s own campaign tried to sell Republicans on casting ballots by mail, but his voters listened to the then-president. In 2020, amid the COVID-19 pandemic, Democrats were vastly more likely to cast ballots by mail than Republicans.

The trend continued in 2022, and its costs were starkly illustrated in Arizona.

Three top-of-the-ticket Republican candidates there who echoed Trump’s lies about the unreliability of mail ballots encouraged their supporters to vote in person on Election Day . An election machine meltdown that day in one-third of the polling places in the state’s most populous county led to huge lines and some would-be voters departing in frustration.

The three top Republicans all lost, including falling 17,000 votes short in the governor’s race and 500 votes short in the one for attorney general.

This time, Republicans say they’re not going to risk leaving ballots behind . Trump’s handpicked chair of the Republican National Committee, his daughter-in-law Lara Trump , has vowed to embrace all sorts of legal election methods to boost turnout that Trump falsely blamed for his 2020 loss, including so-called “ballot harvesting” — letting people turn in mail ballots on the behalf of other voters.

“In this election cycle, Republicans will beat Democrats at their own game, by leveraging every legal tactic at our disposal based on the rules of each state,” Lara Trump said in an interview with The Associated Press.

Turning Point Action, a prominent, pro-Trump group, is launching a $100 million campaign to reach infrequent voters in the swing states of Arizona, Michigan and Wisconsin. That will include offering mail voting as one way to make casting a ballot easier, spokesman Andrew Kolvet said.

“We’d love for elections to be run the way they were before,” Kolvet said. “We can spend our time complaining about it or we can get in gear and play by the rules that Democrats, or largely Democrats, used.”

Even Trump himself has started to recommend mail voting, though he frequently bashes it during campaign events and blames it for his 2020 loss. The RNC is also continuing to file lawsuits against various aspects of mail voting around the country.

Nonetheless, Trump recorded a short video telling his supporters that “absentee voting, early voting and Election Day voting are all good options.”

One recent push to publicize mail voting came during last month’s Pennsylvania primary , when the Republican State Legislative Committee teamed up with a committee supporting the party’s Senate candidate and the state GOP. The goal, said RSLC political director Max Docksey, was “to correct the narrative among Republican voters on mail voting.”

The effort was inspired by what the RSLC saw as a successful effort to increase mail voting among Republicans in the battle for control of the Virginia Legislature in 2023, a fight ultimately won by the Democrats .

The group sent mail ballot applications to 1.5 million GOP voters, sent 475,000 text messages encouraging mail voting and touted the benefits of mail voting at party gatherings.

But at the same time, Pennsylvania Republicans have sued to force the state’s mail ballots to be counted at polling places rather than the county election offices, which have the equipment and space to do the job, That’s among many lawsuits targeting mail voting filed by Republicans around the country since 2020.

The conflicting messages could make it challenging to swiftly reverse the drop-off in mail voting among Republicans.

In Pennsylvania, Republican operatives were pleased with their effort, which they said led to them adding nearly twice as many voters to the state’s mail ballot list as Democrats did during the primary. But the overall share of Pennsylvania mail ballots sent by Republicans remained about the same as in 2020, at only one-quarter of overall ballots, according to data from the secretary of state’s office.

Bill Bretz, chairman of the Westmoreland County Republican Party in the western side of the state, said he’s noticed voters in his conservative area slowly but steadily warming up to mail voting.

“People understand the consequences of this election,” he said. “There’s a lot of buy-in to vote by any method available, and the vote-by-mail bogeyman is beginning to fade.”

Riccardi reported from Denver and Beck from Omaha, Nebraska. Associated Press writers Marc Levy in Harrisburg, Pennsylvania, Martha Mendoza in Santa Cruz, California, and Leah Willingham in Charleston, West Virginia, contributed to this report.

IMAGES

Early Assignment on Naked Puts, Naked Put Criteria, Call and Put Buying
EARLY ASSIGNMENT ON PUTS
How to manage early assignment on a put credit spread in tastyworks
Covered Call Writing: Early Exercise Of Options
Options Early Assignment Process Explained
Step by step guide: How to roll cash secured puts on Robinhood to avoid

VIDEO

Targeting 1.11% ROI
Income Machine or Capital Killer Unveiling the Nasdaq 100 Covered Call ETF Part I
March 29, 2024
Options Playbook Radio 26: Early Exercise & Assignment
Options Chain Analysis: Analyzing Put Options for Early Exercise
Weekend Round Up: Feb 17 Stock Picks Exposed

COMMENTS

Early Exercise Options Strategy
Puts are at greater risk of early assignment as time value becomes negligible. In the case of puts, the game changes. When you exercise a put, you're selling stock and receivingcash. So it can be tempting to get cash now as opposed to getting cash later. However, once againyou must factor time value into the equation.
Trading Options: Understanding Assignment
An option assignment represents the seller's obligation to fulfill the terms of the contract by either selling or buying the underlying security at the exercise price. This obligation is triggered when the buyer of an option contract exercises their right to buy or sell the underlying security. To ensure fairness in the distribution of American ...
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.
The Assignment Risks of Writing Call and Puts
The option writer is always at risk of early assignment at any time through expiration for American-style options. There are several types of assignment risk factors you should understand: In-the-money early exercise. a. Dividend considerations. Exercise at expiration. a. After-hours trading. b.
Dividends and Options Assignment Risk
Avoiding or managing early assignment on covered calls. As noted above, the ex-dividend date is particularly important to anyone who writes a covered or uncovered call option. If a covered call option you have sold is in the money and the dividend exceeds the remaining time value of the option, there is a good chance an owner of those calls ...
Options Exercise, Assignment, and More: A Beginner's Guide
Learn about options exercise and options assignment before taking a position, not afterward. This guide can help you navigate the dynamics of options expiration. So your trading account has gotten options approval, and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then expiration day approaches and ...
Everything You Need to Know About Options Assignment Risk
By Pat Crawley February 21, 2023. assignment; 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 ...
Understanding the Risks of Early Assignment
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 ...
Early Option Assignment Risk Explained (And What To Do About It)
Are you at risk of getting assigned early on your short option positions? Covered calls, credit spreads, debit spreads, iron condors, cash-secured puts, etc....
Uncovered Short Put
Early assignment of stock options is generally related to dividends, and short puts that are assigned early are generally assigned on the ex-dividend date. In-the-money short puts whose time value is less than the dividend have a high likelihood of being assigned.
Options Assignment & How To Avoid It
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 ...
Trading OEX Options: The Risk of Early Exercise
The bid/ask prices for the options change, but the OEX has an official closing price of $540. The index price ignores after-hours trading. The OEX Jun 540 puts (your short option) was $40 before ...
Options: Some Options Are Exercised Early
However, if the put was sold with the sole goal of collecting the premium, then buying the put back before the ex-dividend date is the only sure way to avoid early assignment. Summary. Early ...
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.
Assignment Risk on 'Limited Risk' Options Spreads
The assigned firm must then use an exchange-approved method (usually a random process or the first-in, first-out method) to allocate notices to its client's accounts that are short the options. Credit Spread early assignment example - in-the-money exercise. XYZ stock is currently trading at $80 per share.
Short Put Assignment
How To Avoid Early Assignment. The best way to avoid any early assignments is by simply rolling your Short Put. There are two ways to do this: Defensive Method: This method is to proactively roll your Short Put out & down the moment it gets breached to avoid getting ITM. This way you will always keep the delta below 50 so there's no chance of ...
MODULE 9
The important thing about an option is that the extrinsic or time value must be equal or greater than 0. Thus, exercising options voluntarily removes the extrinsic value for the buyer. There are few reasons options are exercised before expiration because of this. Generally, options could potentially be exercised early when they are deep ITM and ...
Why was my Short Put Option position assigned early?
A possible but less likely reason for early exercise is that the put was a hedge and the share owner wanted to sell his shares and close his option position simultaneously. Also possible but even less likely is an uninformed trader exercising options that have remaining time premium. I understand early assignment of a Call Option when the ...
Why a short options may be assigned early
Interest. Any deep-in-the-money put is at risk of early assignment. This is because it may be better for a long put holder to exercise their put and sell the stock so they can collect interest on the proceeds from the short sale. If you need to borrow money for the stock purchased from an assignment, you will have to pay interest on those funds.
Cash Secured Short Put
Therefore, the risk of early assignment is a real risk that must be considered. However, since sellers of cash-secured puts are generally willing to buy the underlying shares, the possibility of early assignment should not be of great concern. Early assignment of a cash-secured put simply means that stock is purchased prior to the expiration date.
Preakness Stakes Field: Early Horse list and odds ahead of draw
Here is the list of protentional participants and their early odds to win. The 2024 Preakness Stakes field is beginning to take shape. Your inbox approves Best MLB parks ranked 🏈's best, via ...
Did the Pirates give up on Roansy Contreras too early?
Pittsburgh Pirates right-handed starter/reliever Roansy Contreras is now a former Pirate. Pittsburgh designated Contreras for assignment to make room for Paul Skenes on the 40-man and 26-man ...
Biden and Trump accept CNN's invitation to debate on June 27
Hear what they were. President Joe Biden and former President Donald Trump have both accepted an invitation from CNN to debate on June 27, a historically early showdown that will set the tone for ...
Chime Adds Service That Lets Workers Tap Paychecks Early
May 15, 2024 at 11:45 AM PDT. Listen. 2:15. Chime Financial Inc., the fintech known for its fee-free banking services, is now offering consumers the option of accessing as much as $500 of their ...
How Biden and Trump agreed on where and when to disagree
Howard Stern interview put gears in motion. Biden's declaration last month to Howard Stern that he was "happy" to debate Trump, a statement that wasn't planned ahead of time, helped spur a ...
Early positives for tire choices in All-Star audition
0:00. NORTH WILKESBORO, N.C. — It's early still, but the introduction of tire choices to NASCAR Cup Series short-track racing has shown some promise. A compelling 50-minute practice session ...
Early Diagnosis and Treatment of COPD and Asthma
Of 38,353 persons interviewed, 595 were found to have undiagnosed COPD or asthma and 508 underwent randomization: 253 were assigned to the intervention group and 255 to the usual-care group.
Short Calendar Spread with Puts
Before assignment occurs, the risk of assignment can be eliminated in two ways. First, the entire spread can be closed by selling the long put to close and buying the short put to close. Alternatively, the short put can be purchased to close and the long put can be kept open. If early assignment of the short put does occur, stock is purchased ...
After blaming his 2020 loss on mail balloting, Trump tries to make GOP
At rallies and in social media posts, former President Donald Trump has been trying to assure Republican voters that casting ballots by mail and other forms of early voting are "all good options."