What to do if you're assigned early on a short option in a multi-leg strategy
- Thread starter OddTrader
- Start date
OK, one can assume that in the vast majority of cases, the option is trading at or near parity. As stated before, in most cases, you want to trade out of short ITM calls before ex-div. because it's likely that you will be assigned.
With option trading it's always wise to be able to trade the UL in conjunction with the option position.
Assuming that you can hold the UL, there's nothing wrong with taking the assignment. Indeed, the UL will perform equal or better to a short option near parity.
You can always trade out of the assignment and substitute an option with similar attributes, and that is less likely to be assigned. For example, roll up/down and/or out/in and cover the stock. Or you can just close the remaining position.
Once again, it is wise to be well capitalized because of the potential margin impact of such tactics.
There is considerable risk if you cannot hold the assignment or if the stock is unshortable and your short calls are assigned. If this happens, then your position becomes out of balance. It's not a good idea to leave it to chance whether this scenario profits or loses.
Also, I believe that with some brokers it may take some time for the assignment to show up. More risk.
And with many brokers there are fees for assignment that make it too expensive to take assignment.
So, perhaps, some prevention to avoid assignment may be the best course for some. Here, you would trade out of any short option at or near parity and substitute the UL or another option.
With option trading it's always wise to be able to trade the UL in conjunction with the option position.
Assuming that you can hold the UL, there's nothing wrong with taking the assignment. Indeed, the UL will perform equal or better to a short option near parity.
You can always trade out of the assignment and substitute an option with similar attributes, and that is less likely to be assigned. For example, roll up/down and/or out/in and cover the stock. Or you can just close the remaining position.
Once again, it is wise to be well capitalized because of the potential margin impact of such tactics.
There is considerable risk if you cannot hold the assignment or if the stock is unshortable and your short calls are assigned. If this happens, then your position becomes out of balance. It's not a good idea to leave it to chance whether this scenario profits or loses.
Also, I believe that with some brokers it may take some time for the assignment to show up. More risk.
And with many brokers there are fees for assignment that make it too expensive to take assignment.
So, perhaps, some prevention to avoid assignment may be the best course for some. Here, you would trade out of any short option at or near parity and substitute the UL or another option.
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Just trade out of the stock position and re-enter if you're that worried...
I'm just explaining that outside the 3 situations I mentioned, early assignment makes you money. So that would be a good thing...
In the 3 situations that early assignment is likely, the option will have a delta of 1, since the call value will be intrinsic only. If the delta is <1, it means the option has some value above intrinsic. Which means that if you are assigned, you basically capture that extra value instantly. For example, if you're assigned in an ATM (delta50) call, which has a value of say 1.20... you will be short 100 shares per call (usually 100 is underlying size), but you can buy back the shares at market open and basically have earned the 1.20 minus the value the stock trades above the ATM strike. Max earning can be more, if stock traded below strike... no loss possible on this, even is stock trades 10% higher since you would've lost on the short call anyway. So yay!
Indeed only American style options can be assigned early, so no worries with European style.
@donnap , you will not lose on assignment before dividend, since the call value is intrinsic to the stock value before dividend.
The only way you can get caught in a shit storm is when you're assigned early in uncovered calls and for some reason you're stuck in with short stock position with high rates in the middle of some corporate action, takeover/merger or bankruptcy and you don't know what you own or get or have to deliver...
@OddTrader you wanted a discussion... what do you want to hear? Looks like you're a bit out touch here...
"What to do if you're assigned early on a short option in a multi-leg strategy?" Be happy and otherwise just re-enter or rollover...
"What to do if you're assigned early on a short option in a multi-leg strategy?" Be happy and otherwise just re-enter or rollover...
Hey Jack,
Yeah, you're right about the short ITM calls. My bad. You end up owing the div. though.
Actually, depending on the option position, you'd be better off in the unlikely scenario of the ITM calls not assigned. The short ITM calls will not adjust to ex-div. as much as puts and OTM calls. This is in favor of the seller.
I don't know what OP wants to hear. He certainly is an odd one.
Yeah, you're right about the short ITM calls. My bad. You end up owing the div. though.
Actually, depending on the option position, you'd be better off in the unlikely scenario of the ITM calls not assigned. The short ITM calls will not adjust to ex-div. as much as puts and OTM calls. This is in favor of the seller.
I don't know what OP wants to hear. He certainly is an odd one.