If you are a writer and/or or combo player, what kind of strategies do you use to circumvent early assignment?
Early assignment
- Thread starter candletrader
- Start date
You can't really "circumvent"...just be sure that you have the risk factor in your valuations when selling....and watch closely around x-dividend date....
We get 50 or so a week....I'm surprised when we don't get some around x-date...I figure that's just extra "free money"....
Don
Thanks for your reply Don... by circumvent, I mean avoid... do you have any approaches to cover prior to assignment, by coming to some formalized probability as to the near-term risks of assignment?
Also, how much of the stuff that you get assigned is naked versus one block of a limited risk combo?
We are rarely "naked" - and get our assignments an hour before the opening so we have a chance to cove...
Don
Option buyers seldom exercise early. They usually just sell the contracts to take profits. For example, I sold some QQQ options expiring within two months, which later became at least 4 points in the money. Nothing has happened. In addition, I have been constantly writing options for 18 months already. So far no early assignment yet.
If the options are 20 or 30 points in the money, it may be a different story. That happened to a friend of mine. He sold some Put Leaps, when JDSU was at 80. Then, the underlying tanked like a rock. He was assigned long before expiration. However, if he were a trader, not an investor, he would have cut his loss by buying back the Leaps before the assignment.
Historically, approximately 30% of existing option positions expire âlong at expirationâ with little or no value. Approximately 60% of option positions are opened and subsequently closed during the term of the contract. And, only about 10% of all options are exercised.
Interesting statistic from the OIC...
Interesting statistic from the OIC...
It happens in MO? Does that mean people use this strategy successfully or there is early execution?
Short call/long stock should be pretty close to delta-neutral if the option is significantly in the money, which is generally necessary if you want to sell calls where it is optimal to exercise early. So there shouldn't be much exposure.
As for buying a put to capture the dividend, the requirements for profit change:
With long a put: You profit only in the case where the put is mispriced for maturity.
With short call: You may profit in the case where the option is correctly priced (for executing just before the dividend), and rely only on the weaker assumption that there exists a sufficient probability that the option will not be exercised.