I am a beginner options trader and have made a couple of mostly successful trades now. My question is basic, so I hope someone with experience can answer. It seems to me that trading options is almost exclusively about trading contracts, rather than dealing with the end point of exercise or assignment? What is the story here, as it seems like this aspect of trading options, which appears to be 95% of the actual trading that goes on, is not focused on or even mentioned in educational materials and even tips (I may be wrong about the last part). Yes, you have to understand how the entire mechanism works in order to trade contracts with strike prices, the Greeks, and everything else that comes along, bid/ask prices, technical and fundamental analysis, all of it. But it appears that in practice almost all options traders do is trade contracts? Now, have you ever seen that apparent fact clarified in any education materials you have ever read? I haven’t and I feel like I’ve read a substantial amount by now and watched dozens of videos, etc. as well as talking with my brokerage company. Am I incorrect? What is the story here? Because, again, educational materials and even tips seem to almost hide this fact, not to say completely leave out the aspects of necessary education to master trading those contracts as opposed to dealing with exercising and assignments, which apparently happen once in a blue moon, unless you are really holding your contracts to expiry or early exercise, etc. It just seems bizarre to me that educational materials not only omit this, but essentially encourage those learning to think that what they are describing is actually what occurs during the course of a trade. Help? Thanks in advance for non-snarky replies and honest, sincere answers welcome! Have a good trade and a nice day. I ask to confirm that I am not crazy and that trading contracts is actually what trading options is primarily about in terms of what happens in practice - not getting to an expiry date or profit/loss scenarios, etc.
Trading contracts and exercising/assignments
- Thread starter Mvtrader
- Start date
Robert Morse
Sponsor
Mvtrader-If your question is, do most option traders look to open/close trades looking to profit from the difference vs in the end buying/selling stock on expiration, I would agree with that.
Last edited:
I think you're imagining some sort of a distinction that doesn't really exist (unless it's what @Robert Morse mentioned above.) Whether you call it "trading contracts" or "trading options", the difference is purely descriptive - it all comes down to selecting what you want to trade and clicking a few buttons. "Trading contracts" does not mean that you're transferring a stack of papers with fancy engraving or having to engage in arcane negotiations with a broker; it's the same process. (And yes, most traders do close their contracts before expiration to avoid exercise risk - often even earlier to avoid gamma risk, etc. This is mentioned in all the training materials I've ever seen.)
Nobody is hiding anything from you. You can describe it as trading options/contracts/options contracts, or buying/selling puts and calls, or trading volatility/derivatives... it's just part of the lingo. If there's some specific distinction you're looking for - say, American vs. European options - that's a different deal, but still part of the knowledge base you need to trade effectively.
I didn't understand your basic question, and I'm not sure anyone else did...?
I suspect you're asking how & how often option traders deal with expirations and assignments, and why this isn't covered in educational materials?
Or can you clearly state your question in a single sentence like I just did?
Last edited:
If your trading covered calls and cash secured puts, you're pretty indifferent about whether you close them before expiration or let them go through assignment. Though I'd imagine most people would tend to roll the contracts, or maybe not. The point is that you can do it either way.
When you're trading spreads it's important to close out the short contract and not let it go through assignment (unless you can cover it). So most spread traders will close their positions prior to expiration.
Some trades like calendars and butterflies usually are not held to near expiration for other reasons.
I'm not sure if that's what you're asking, but that's pretty much what people do.
When you're trading spreads it's important to close out the short contract and not let it go through assignment (unless you can cover it). So most spread traders will close their positions prior to expiration.
Some trades like calendars and butterflies usually are not held to near expiration for other reasons.
I'm not sure if that's what you're asking, but that's pretty much what people do.
- The OP is wondering if option traders also trade the underlying.
- He notices that about 95% of option trades are buying and selling the options - no trading of the underlying at all.
That is correct - most option traders have no intention of trading the underlying and there is no benefit to do so.
Great to hear so many genuine responses! Actually, my “question” was more about the fact that I have never read nor seen, in all the books, online materials, and videos I have watched, a few sentences that say something like:
“Keep in mind, most options traders rarely allow their options trades to be exercised or go through assignment. Nearly all options trades are closed out long before, or sometimes closer to, the expiry date, depending on the expiry date chosen, or they are rolled. When trading options, it is important to understand exercise and assignment, but ultimately, trading options is primarily about opening and closing positions on an option of the underlying asset at a predetermined strike price with a set expiry date.”
Never seen any kind of educational material ever concede or admit this practical matter (much less attempt to educate about it, especially how to consider when to close) and I know for me, not making that clear was something that was insane to learn on the job in my first few options trades. For one, if you know this, you actually know what trading options really amounts to, regardless of the strategy. Even the example someone gave of rolling a covered call was a good one.
I know I would love to read and be educated about strategies for when to close out of a position. Most educational materials that I have come across only discuss what happens at expiry, and do so with an example of a set price, when options contract prices fluctuate enormously over the course of a single trading day! This type of discussion, however, now opens up a whole world, which is not the topic of this thread. But if people do know good educational tools to learn about how and when to close out of positions and roll positions, send them along!
“Keep in mind, most options traders rarely allow their options trades to be exercised or go through assignment. Nearly all options trades are closed out long before, or sometimes closer to, the expiry date, depending on the expiry date chosen, or they are rolled. When trading options, it is important to understand exercise and assignment, but ultimately, trading options is primarily about opening and closing positions on an option of the underlying asset at a predetermined strike price with a set expiry date.”
Never seen any kind of educational material ever concede or admit this practical matter (much less attempt to educate about it, especially how to consider when to close) and I know for me, not making that clear was something that was insane to learn on the job in my first few options trades. For one, if you know this, you actually know what trading options really amounts to, regardless of the strategy. Even the example someone gave of rolling a covered call was a good one.
I know I would love to read and be educated about strategies for when to close out of a position. Most educational materials that I have come across only discuss what happens at expiry, and do so with an example of a set price, when options contract prices fluctuate enormously over the course of a single trading day! This type of discussion, however, now opens up a whole world, which is not the topic of this thread. But if people do know good educational tools to learn about how and when to close out of positions and roll positions, send them along!
Last edited:
I think that this topic is dependent on specific options strategy and trader’s experience, while also being unpredictable to the point that experienced option traders can get caught off guard. On another hand, most people don’t need to worry about it or deal with this as assignments simply won’t affect them. When you get assigned then so what, you close the stock position, yawn, and move on. You may just get a little nervous but then learn from experience.
But there been cases when people were selling put spreads, say on Tesla, and only one leg was in the money at expiration so they ended up being assigned shares on that leg while the other one expired worthless. Then the shares tanked over a weekend and people were losing tons of money while owning 100s of shares.
It’s difficult to think of every situation but at least you need very solid understanding of how options work and gain practical experience to get approved by the broker to trade at different levels, at least in theory.
And in theory trading options does require good analytical and observational skills to connect the dots. Books could potentially describe some sample cases, but not enough to cover every situation. A boxing coach can teach you a lot, but not what an opponent will do, unless you get a really great coach and spend years practicing before your first fight. In fact, you may not even have any advantage with options unless you can outsmart others and figure out more things on your own then everyone else did, without going broke.
I also suspect that some books may describe those topics in detail, while the free stuff on YouTube and online may be too focused on their specific strategies and objectives. More stuff can be found if you dig deeper.
But there been cases when people were selling put spreads, say on Tesla, and only one leg was in the money at expiration so they ended up being assigned shares on that leg while the other one expired worthless. Then the shares tanked over a weekend and people were losing tons of money while owning 100s of shares.
It’s difficult to think of every situation but at least you need very solid understanding of how options work and gain practical experience to get approved by the broker to trade at different levels, at least in theory.
And in theory trading options does require good analytical and observational skills to connect the dots. Books could potentially describe some sample cases, but not enough to cover every situation. A boxing coach can teach you a lot, but not what an opponent will do, unless you get a really great coach and spend years practicing before your first fight. In fact, you may not even have any advantage with options unless you can outsmart others and figure out more things on your own then everyone else did, without going broke.
I also suspect that some books may describe those topics in detail, while the free stuff on YouTube and online may be too focused on their specific strategies and objectives. More stuff can be found if you dig deeper.