Tales of a Technician: Quell your Unfounded Assignment Fears | Tackle Trading: The #1 rated trading education platform

Tales of a Technician: Quell your Unfounded Assignment Fears

Options 101. Essential for beginners. FREE as part of the PRO Membership. click on the image to try it free for 15 days.

Last Update: August 2021

The assignment hobgoblin has been haunting the dreams of novice traders since the dawn of the options market. At first, he’s hidden. Traders tackling the basics of call and put buying remain oblivious to his existence. At some point, most dollar seekers tire of the frequent losses that beset them during the game of option buying. That’s when they take up their journey down the learning path eventually venturing into option selling territory. And that, my friends, is where the monster resides. Initially, he’s very mysterious, spooky even. Blame it on the fog. It surrounds him masking his true form. As a result rookie traders’ imaginations go wild.

Tales of a Technician: Quell your Unfounded Assignment Fears

It’s just like my boy’s favorite bedtime story: A Fly Went By.

A Fly Went by: Book by Michael McClintock

It chronicles an exciting animal chase which builds page by page. First, it’s a fly fleeing from a frog. But the frog doesn’t want the fly, no, he’s simply running (hopping?) away from the cat who’s running from the dog. The chasing chain continues (complete with a pig, cow, and fox) until we discover the initial catalyst: A man with a gun running from something scary. Or, at least that’s what his lizard brain is telling him. Like the assignment hobgoblin he’s not really sure what the scary something even is.

Don’t be the man with the gun.

You see, it turns out that bump and thump he heard was merely a little lamb stuck in a can. His fears were unfounded! Should have done a bit more investigating before soiling the trousers, eh, dear hunter?

Allow me to unmask the so-called assignment bogeyman. He’s not all that scary. Quite the contrary he’s often like a profit mailman delivering dollars straight to your doorstep.

Assignment occurs when an option seller is required to make good on their obligation to buy or sell stock. When you sell a call you promise to sell the stock at the strike price. When you sell a put you promise to buy the stock at the strike price. If assignment occurs you simply have to make good on your promise.

No Indian givers are allowed in the options market!

At expiration, assignment becomes automatic for any short ITM options. OTM options simply expire worthless. To avoid assignment you need to buy to close any short ITM options before expiration. But that’s not what most people are worried about. It’s the early assignment that gets their knickers in a twist.

If you’re selling American Style options (pretty much everything but Index options) there’s a chance you could be assigned early. Fortunately, early assignment is incredibly easy to avoid if you simply pay attention. First, you will never be assigned early on a short OTM option. And if you are, then the idiot on the other side of the trade just gave you lots of money.

When budding traders hear that they usually conclude that if their short option moves ITM then early assignment is imminent.

NOT TRUE.

When someone exercises an option – that’s what has to happen for you to be assigned -they lose any remaining extrinsic value (aka time value). As long as there is extrinsic value remaining in the option they won’t exercise. Which means you won’t be assigned, so stop worrying about it. It’s just a little lamb stuck in a can.

Here’s the rule of thumb I suggest: If your short option moves ITM and it loses all its extrinsic value and you don’t want to be assigned, then close the trade.

Now, in the event you are assigned early, don’t panic. It’s not like the market gods just cursed you with massive overnight losses. Most of the time your option position simply turned into a stock position with the exact same unrealized gain or loss. You can usually close the stock position and incur the same gain or loss you would have incurred by simply closing the option trade the day prior.

If you’re picking up what I’m laying down at this point, you’re good to go. Run along and play. If you need an example, read on

USO is trading for $11.20. I originally sold the Jan 12.50 put for 50 cents. With the put now worth $1.30 my current unrealized loss is 80 cents per share, or $80 total. Take note, the put has no extrinsic value at this point. It’s trading at parity as the cool kids say.

Suppose I was unexpectedly assigned and the next day I wake up long 100 shares of USO. I had to buy the shares at the $12.50 strike, but because I received 50 cents premium upfront my cost basis is actually $12. With the stock at $11.20, my unrealized loss is still 80 cents per share, or $80 total. See, nothing changed with my profit/loss even though I was assigned. The only difference is I now have to sell the stock to incur the $80 loss and close the trade whereas the day before I would have had to buy to close the put to exit the position.

We could also illustrate the equivalency in position by looking at the delta. Since my short 12.50 put had no extrinsic value it was probably deep enough ITM to have a +100 delta. If that short put turns into a long 100 share position via the assignment process, guess what? My delta is still +100. So my directional exposure hasn’t changed at all. If the stock rises or falls I’ll incur the same gain or loss in the stock position that I would have in the short put position.

The same takeaway applies if you were short a call.

Assignment hobgoblin unmasked, mystery solved, case closed. Huzzah!


Options Trading for Beginners

Continue learning the basics of Options trading with this additional freemium content from Tackle Trading.

Options 101 [Free Content]

Access more free high-quality articles to improve your knowledge of Options Trading.


The Options Heuristic Series [Free Content]

How can we explain the basics of Options so that our students can really learn, without getting confused with so many concepts, terminologies, and strategies? That’s the idea behind the series.


Options Greeks Guide [Free Content]

The Options Greek Guide is a simple, powerful resource to help you better understand how to use the Greek’s.
As you build, enter, and manage Options Trades, it’s helpful to understand the math behind the Black Scholes Option Pricing Model. Using the Options Greek Guide will give you the information and training on how time, volatility and asset price changes impact options values.


Options 101 Course [Premium Content]

The Options 101 Course is exclusive to PRO members. Try it for free for 15 days by clicking on the button below.


Options Report [Premium Content]

The Options Report is a weekly briefing delivered to Pro members of Tackle Trading. In this report, you will receive information and education that will help you develop as a trader. We will also highlight attractive trade setups for the coming week that you can add to your watchlist.


Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.


Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

8 Replies to “Tales of a Technician: Quell your Unfounded Assignment Fears”

  1. KEITHGIUNTA says:

    Thanks for adding the concrete example; I usually need them. (Is concrete a commodity? They say the the pun is the lowest form of humor but I kind of like ’em.)

  2. Tyler Craig CMT says:

    Love the pun. Glad the example helped.

  3. MatthewMcQueary says:

    Great read, Tyler. Quick question: I am anticipating being assigned on some USO soon, and possibly UNG and SLV next month (all naked puts). This is fine with me because I want to own these long term, commodities shouldn’t go broke, and the discount seems pretty good right now. I understand the assignment fee is pretty hefty with TOS (about $50?). Is the assignment fee then multiplied by number of 100 share contracts, or is it a flat fee per assignment episode? Either way it will not break me, I am just curious and seeking clarification. Thanks for sharing your wisdom and guidance.

  4. Tyler Craig CMT says:

    As far as I’m aware the assignment fee is $15. Check out Harshal’s comment below for a couple examples. I would double check with TOS or whoever your broker is if not TOS on the cost details. If it were me and I really wanted to buy the stock, I’d simply buyback the short put right before expiration (paying about $1.25 per contract), then pay around $5 for the shares of stock I want to buy. It’s much cheaper and accomplishes the same thing.

  5. MatthewMcQueary says:

    That makes good sense. Thanks for the tip!

  6. RaymondRoyer says:

    Thank you Tyler. Great explanation.

  7. Harshal Shah says:

    i’ve been assigned on covered calls and naked puts a few times and it isn’t exactly $15 per contract, but rather $15 per assignment.

    so if you had 10 short calls/puts, and all ten were assigned simultaneously your fee should be $15.

    but

    if the ten contracts were assigned separately (five today and five tomorrow) you would be charged the assignment fee twice, total $30.

    ten separate assignments would be $15 each. or $150 total.

  8. Tyler Craig CMT says:

    Harshal,

    Good lookin’ out. You can tell how much I actually get assigned… I’ve amended my prior comment.

Comments are closed.

Share this

X
Facebook
LinkedIn
Reddit
Pinterest
Telegram
WhatsApp

More Insights

Join the #1 Rated Trading Education Platform

Learn to generate monthly cash flow from the financial markets and how to grow long-term lasting wealth. Tackle Trading is an amazing online community for active traders that is led by seasoned market professionals. Tap into the power of Tackle Trading’s proven trading system and learn how easy it is to make money with the proper coaching and education.

8,800+

Members

100+

Reviews

Ready to take your trading to the next level?

Get in touch today and receive a FREE complimentary consultation.

Let us help you start trading!

Our Pro Membership gives you the tools to tackle all your trading obstacles.

Register for the Master Trader Live Workshop and get the First 15 Days on Us

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.