How bad is early assignment?

A

artvandaley

Hi there,

I started tinkering with options earlier this year, I started with straight calls and now I'm trying out different types of spreads. Last month I initiated a calendar spread and the stock rallied soon after. With roughly three weeks to go until the short call's expiration, it was trading at parity. According to an Option's book I have, early assignment is to be avoided, so I became nervous and closed the spread, luckily it was a small loss. However, I recently read elsewhere that early assignment isn't necessarily a bad thing. I really didn't want to closed the spread for I believed the underlying would come back down, which it has, and is currently at the strike a week before expiration, could've been looking good right now. Anyway, as in the title, how bad is getting assigned early?
 
"However, I recently read elsewhere that early assignment isn't necessarily a bad thing."

^ That one. It can even be a happy-happy-joy-joy thing. Unfortunately, at your knowledge level, explaining in greater detail would be exhaustive.

Burn book #1. It was written by a moron.
 
I've got a trade that's deep ITM right now, but when I glanced at it today, I noticed that the extrinsic was almost exactly equal to my negative P&L on it. I.e., if I got assigned on it today, it would break even instead of taking a chunk out of my wallet.

That would be almost as amazing as that hayloft thing with the librarian chick when I was 17. Except I hope that whoever is on the other side of the trade won't fling his glasses like that (took damn near an hour to find them after.)
 
BlueWaterSailor said:
I've got a trade that's deep ITM right now, but when I glanced at it today, I noticed that the extrinsic was almost exactly equal to my negative P&L on it. I.e., if I got assigned on it today, it would break even instead of taking a chunk out of my wallet.

That would be almost as amazing as that hayloft thing with the librarian chick when I was 17. Except I hope that whoever is on the other side of the trade won't fling his glasses like that (took damn near an hour to find them after.)
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lol. ohhh. those were the days
 
With calls you generally will only be assigned early when there is little or no premium AND there is an upcoming dividend OR the stock is hard to borrow. If you are assigned without these situations, it is not necessarily a bad thing. You will the be long your other call (if it was a time spread as you mentioned) and short stock. This position doesn't give you any more risk just opportunity. The problem would be that it requires more capital to hold this stock position and you would get a margin call if you don't have enough money to hold it.
 
Early assignment isn't the end of the world. It's only bad because it ties up capital you could be using elsewhere. It's theoretically bad because you could be assigned on a short put and the stock falls through the floor but that really doesn't happen much in reality.

Also just because a contract is ITM a ways doesn't mean it will be assigned. The assignment risk is almost 0 in a stock that doesn't have a dividend coming up (since there's very little value in exercising the option). It gets more tricky near expiration or if it moves far ITM.
 
Great stuff guys! Thank you so much for taking the time to respond and share your expertise. I have a feeling I'll be back soon with another question or two.

Thanks again,

Mark
 
gaussian said:
It's theoretically bad because you could be assigned on a short put and the stock falls through the floor but that really doesn't happen much in reality.
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Assignment will not change your delta. It's a substitution.

It's the guy who assigns you who risks getting f'd. Which is why you should NEVER assign an option w/o first buying the corresponding OTM, and why the offer for that OTM should be the premium used to correctly calculate if the ITM options should be exercised in the first place. Not that anyone listens.
 
Wheezooo said:
It's the guy who assigns you who risks getting f'd. Which is why you should NEVER assign an option w/o first buying the corresponding OTM, and why the offer for that OTM should be the premium used to correctly calculate if the ITM options should be exercised in the first place. Not that anyone listens.
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I've never run across anyone telling me anything of this sort, but it sounds pretty cool - so I'm going to try unpacking it (mostly for myself, but anyone else is welcome to hum along if they know the tune.) @Wheezooo , please feel free to let me know if I've missed what you mean; I'm not too proud to say that I'm still learning, and am still ignorant about a whole bunch of options stuff.

So, wild guess: when you assign an option, the price may change between assignment and delivery. Call a $100 stock away for $95 (and pay the $9.5k) on Friday, and you may be holding a hundred shares worth $0.01 on Monday and crying in your beer about not buying a put with some of the money you made on the deal.

If you did listen to @Wheezooo (and probably shocked him thereby :) ), then you would take your projected gains ($500 minus premium; say, $200, which would leave $300 in your pocket) and buy some insurance. A long put at the next expiration, maybe at or a bit above the $95 strike ($50-$70.) Now you've got a married put; if the price drops, you're protected. Was the whole thing worth the bother? $230 or so says "yep".

(Assuming I didn't totally miss the pitch... why wouldn't you buy, say, the 102.5 long put? Sure, it's not ITM and it would cost ~$250, but you'd be holding a put above the market - and you'd be able to sell most of it back with the stock come Monday.)

I'm not sure how this would work if you were assigning a put, since it seems like you could buy the stock cheaply on Friday and would have it to deliver (for a higher price) on Monday.
 
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