How often does an option contract you are trading get assigned?
Rarely. Because we are mostly selling options far out of the money it is very rare for us to have an option contract assigned. Even if the option strike price goes ITM before expiration it’s also rare to see the contract assigned because most assignment happens the week of expiration. Just because an option goes ITM early in the cycle does not mean that the contract will be assigned automatically. As a general guideline, less than 1% of the trades that we make get assigned after tracking them historically.
Is my short option contract at risk of assignment?
Generally your short option is not at risk of assignment until the last week of expiration. Technically speaking an option can be exercised and assigned at any point up until expiration but almost 90% or more of assignments happen the last week of expiration so don't freak out. If you get to the last week of expiration and you have a short call or put option ITM then you'll need to go ahead and reverse the trade and buy back the option to close the position or you do risk being assigned the stock. At Option Alpha we always prefer to avoid carrying any ITM positions the week of expiration so we’ll be pretty active in closing or rolling positions that are close the week before expiration.
I’ve been assigned a call/put option and now have the stock - what should I do exactly?
First, don’t freak out - it’s normal and part of the game. If you have been assigned a put option, you are now long shares at the strike price for your option contract. This means that you now have let’s say 100 shares of stock for everyone short put option that you had originally wrote. Even though the position underlying changed from an option contract to long stock, you still have a overall long position in the stock that you were trading just as you did with your short put option. Therefore, your directional assumption should not have changed from the original position to now. In this case, you do have a couple options on how to manage this position. If you like the stock and want to maintain the long position, you can hold the shares of stock in your portfolio. If you do not have enough capital in your portfolio to maintain the position, you can sell back the shares of stock immediately and take the difference between the stock price and your strike price as a profit or loss. If you sell back the shares you can also choose to simultaneously resell another put option further out in the expiration cycle, maybe the next month or two months out, to maintain that short put exposure. If you were holding a credit spread for example you would also have a long put option that you could exercise with your broker thereby cancelling out the effect of the stock position. Being assigned a short call option works in the same way just in the opposite direction. At the end of the day assignments will happen but they are manageable and are nothing to fret over.
How can I tell the difference between weekly and monthly options using the option tags?
Weekly options always carry an additional tag compared to their monthly counterpart. For example, a monthly option might be MAR16, designating that it is the March 2016 contracts. Now let’s compare this to a weekly option with the tag: MAR216. These are the March 2nd week expiration options for 2016. You might also see option contracts for MAR1, MAR4 which are the March 1st week and March 4th week expiration cycles respectively. Remember that weekly options expire each and every Friday except for the 3rd Friday in the month when the traditional monthly expiration options expire. In this case the monthly expiration options act as if they are the weeklies for the last week.
What does it mean if an index is cash settled?
Indexes like SPX and RUT are cash settled meaning that at expiration you do not actually get shares of the indexes either short or long but rather the options are settled to the cash value of the position at that time. This is in contrast to most equity options which are settled to actual physical stock of the underlying symbol.
I have an option that is ITM and expiration is this week - what will happen and what should I do?
Any option that is in the money (ITM) at expiration will be assigned or exercised automatically by your broker if you do nothing. In this case, what you'll need to do is determine how you want to handle this position ahead of expiration. If you are short in option that is ITM, you will need to buy back the position to close it or roll the contract to the next month to avoid assignment. If you are long in option that is ITM, you will need to sell it back to the market or roll the option to the next month to avoid automatic exercise. Since most option assignment and exercising happens in the last week of expiration, at Option Alpha we always suggest that you manage any positions that are close to being ITM the week before expiration.
Do you ever take assignment of the underlying stock?
Yes. We have been assigned stock numerous times on short option positions. We do not prefer to hold the stock long afterwards because it is a waste of capital in our opinion. If you are assigned stock, and even if you like the company long-term and want to directionally play the position, you're better off to use an option strategy which takes far less capital requirement, like a synthetic stock replacement strategy, than to hold the stock long. We realize that assignments will occur throughout the year randomly and that they will never dramatically alter or change our income and return stream from trading options. It’s part of the game and 100% manageable if you just take the time to slowly think and work through the process.
Is the option assignment process truly random?
Yes. The OCC manages the entire option assignment process and randomly chooses brokers which randomly choose clients. There's no secret process for being assigned an option contract. If you believe that option contracts are being assigned to you because of some outside “bad luck” feeling you just have to realize that it is in fact a random process. Based on our tracking historically we have only ever been assigned less than 1% of the time on our positions.
It is the week of expiration and I have an OTM long option that is worthless - do I have to close it out?
No. If you are holding a long or short option that is out of the money and worthless you do not have to close out of the position. The position will go through the expiration cycle and since it is not in the money, it will expire worthless. I always suggest that you only close a position if you can get money out of the position after commissions. So, if you're long option is out of the money and worth $5 but your commission costs are $7, I would not close out of that position because you would be out with a net loss of $2 after commissions. If the option is worth $20 and your commission costs are $7, I would choose to close out of that position because after commissions you would get back $13 per contract.
When do weekly vs monthly options expire?
Weekly options have an 8 day life cycle and are introduced each Thursday and expire 8 days later on the following Friday, with adjustments for holidays. In contrast, monthly options expire on the 3rd Friday of each month and are introduced randomly throughout the year many months in advance of expiration.
I am trading a covered call and the stock price rose beyond my short strike - can I buy back the short option contract to avoid losing the stock?
Yes. If you are trading covered calls and the stock rises behind your short call strike price, you can buy back the short call at any time before expiration to avoid losing the underlying stock. This also means that you might have to buy back the long call for a premium higher than what you sold it for and lose the difference between what you sold the call for and what you have to buy back for. Remember however, that during this period you did own the stock and if the stock price rose far enough you generally made a bigger profit on the value increase in the underlying stock than you would lose in the value of the short call.