The prospect of having options automatically exercised can scare a lot of traders.
Beginner options traders often fear the effects of having an option assigned because the process is partially involuntary.
Anyone holding an in the money short option can receive an assignment at or before the option’s expiration.
David Jaffee of BestStockStrategy.com teaches his students to sell option premium, earning a consistent profit.
By following the best options trading strategy, you can minimize your risk and quell your fears of option assignment.
Keep reading to learn what happens when an option gets assigned.
What is an option assignment?
To become a profitable trader, you have to implement proven strategies for success and learn the basics of options trading.
If an option contract is exercised, assignment occurs.
The contract owner exercises their options contract, and the option writer is assigned to complete the contract’s requirements.
Assignment refers to the transfer from one party to another, involving rights or property.
An option seller writes an option contract, and a buyer purchases the right, but not the obligation, to buy or sell shares of the underlying asset at the strike price on or before the expiration date.
If the option holder chooses to exercise their right, they are matched with an option seller with an open position.
Matching sellers and buyers occurs through an automated process and sellers are randomly assigned.
Once assigned, the seller has to fulfill the rights of the buyer.
For a call option, the seller has to sell the specified number of shares of the underlying stock at the predetermined price.
Being assigned a call option is often referred to as having stock called away.
For put options, the seller has to buy the set number of shares at the strike price.
When do options get exercised?
New options traders sometimes make the mistake of thinking options are only exercised at expiration.
However, option assignments can occur prior to expiration. This process is referred to as early assignment.
Early assignment is random, and it can occur if a trader holds a short in the money option.
The randomness and uncertainty of automatic assignment is why option writers have to have options margin and sufficient funds to fulfill an options contract.
When the option buyer exercises the rights of the option they purchased, the Options Clearing Corporation randomly assigns the exercise notice to members of the Clearing.
Do all options get exercised?
Options are not always assigned.
An option that expires out of the money will not be assigned unless the buyer chooses to exercise their rights.
In some cases, letting an option expire worthless can be the best decision.
An option that expires worthless is essentially a worthless bet that did not end up paying off.
If you are tired of gambling and want to act like the casino then it's best to learn how to sell option premium.
With the right options trading strategy, you can win almost ~95%+ of your trades.
The ideal scenario for an options writer is for an option to expire worthless.
The option seller collects 100% of the option premium and earns a profit when options expire.
Do all in the money options get assigned?
If a short stock option is in the money 1 cent or more by expiration, it will be assigned.
The threshold for automatic assignment can differ by brokerage, but most choose the same threshold as the Options Clearing Corporation of 1 cent.
Automatic assignment occurs for all in the money options, regardless of it being a call or put.
Option Assignment After Hours
There are some exceptions to this rule of automatic assignment, though.
In very specific circumstances, an option may expire in the money and not be assigned.
For most investors, trading ends at 4pm EST on the Friday that the option expires.
However, traders are able to trade for 90 more minutes, or until 5:30pm EST.
In some situations, a trader may provide a contrary exercise notice, which tells the Options Clearing Corporation to not exercise the option.
Almost all in the money options are exercised by 4pm EST on the Friday of expiration, and the exceptions are few and far between.
Realistic Changes of Being Assigned
In reality, if you write options, then you're not going to get assigned as long as there is extrinsic (time) premium left on the option.
The reason is that if you're assigned, then you can immediately liquidate the assigned position and then re-sell the option and capture additional extrinsic premium.
By exercising options that have extrinsic premium, the holder of the option would be giving “free money” to the option writer.
Even so, from my experience, deep ITM puts that have less than 5 cents of extrinsic premium left on them are at risk of assignment.
I have never experienced an option with more than 10 cents worth of extrinsic premium left on it get assigned.
Odds of Being Assigned Options
Option assignments are not as common as you may think.
In fact, only 12% of options are exercised, so only about 12% of short options are assigned.
Short in the money put options are more likely to be assigned than short in the money call options, and put options are exercised more often than call options.
If you want to avoid option assignment, you can buy back the short option prior to expiration.
If you are worried about option assignment and potentially losing money through options trading, visit BestStockStrategy.com.
David Jaffee teaches the highly reviewed option trading strategy to minimize risk and maximize your potential for profit.