When it comes to options trading are you at risk for stock assignment? That's a question new options traders can focus on.
How realistic is it that you'd be at risk for stock assignment? Let's read more to find out.
Are You at Risk for Stock Assignment?
When I talk to traders, especially those interested in options trading, one of their biggest fears is getting assigned stock.
To refresh your memory, when you buy/sell an option, you control 100 shares of that option’s stock. Even more unsettling is the options traders who never think about assignment as a possibility until it happens to them.
So are you at risk for stock assignment? It's like a pop quiz at school - generally unexpected and typically jarring if you haven’t factored in the assignment.
Even more so if you’re running a multi-leg strategy like long or short spreads, and usually it’s not a good feeling!
Well, I’m hoping to help you put some of that anxiety to rest with this post. Let's start with the 3 most common questions we get asked here at the Bullish Bears stock trading service:
- In what situations would I get assigned stock?
- How do I prevent being assigned stock?
- If I am assigned, what do I need to do?
When Will I Get Assigned
Are you at risk for stock assignment? As an options seller, you have no control over an assignment.
First things first, let's tackle the most obvious question, "when will I get assigned share of stock?". In our experience, the easiest way to be assigned stock is if you short (sell) an option that expires in the money.
On the flip side, when you buy an option -either a call or a put, you cannot be assigned stock unless you decide to exercise your option(s).
As the purchaser of an option contract, you are in control. And by control I mean you, and you alone will always have the choice to exercise the option.
Do you see how I wrote a choice? Yes, you have the choice but not the obligation to do so.
Let’s say you bought a Facebook (ticker symbol FB) option a few weeks ago and it is set to expire today. Right now, since the option is in the money - there is never a risk of assignment. Because of this, you have two choices, you can:
- Let the option expire in the money to collect the profit, or...
- Decide to exercise the option and collect the 100 shares of stock
That said, let’s circle back to the most common way to get assigned stock - selling options. Make sure to take our options strategies course to learn how to safely sell options.
Selling Options and Your Risk of Stock Assignment
Are you at risk for stock assignment? Put simply, you will be assigned stock if you sell an option that is in the money at expiration.
It boils down to this: as the options seller; you have no control over an assignment, or when it could happen. Typically the risk of assignment increases as the expiration date gets closer. With that said, an assignment can still occur at any time.
Let’s say you sold an AAPL (ticker symbol for Apple) option a couple of weeks ago. Your option is set to expire today and its in the money.
If this happens, you are automatically assigned 100 shares of stock. So if you sold a call, you would be assigned, and if you sold a put, you would be assigned.
In both cases, it's 100 shares of stock for each one contract. Check out our trade room where we talk options.
Are You at Risk for Stock Assignment When Selling a Naked Call?
When you buy a naked call, you have control over what you do with the option. But, when you're the seller of a naked call option, you have no control over assignment if your call expires in the money.
And, it only has to be $.01 in the money for the assignment to happen. If you find yourself in this situation, you automatically will be forced to sell 100 shares of stock to the person who bought your option.
Hypothetically, let’s say you sell a FB call option to your friend Amanda at a strike price of $525. Amanda then decides to exercise her option because it’s in the money.
You then have to turn around and sell her 100 FB shares for each option contract at $525/share. Even if you do not own FB stock, you will still have to sell Amanda the shares. Now you find a situation in which you are short 100 shares of FB stock.
Two Key Things to Be Aware of
- Assignment and commission fees. If you do not close the trade out or roll it before expiration and have to sell the shares, you’ll have fees to pay.
- Dividends. Be wary when a company has upcoming dividends because this will increase your assignment risk. You need to be on high alert if the extrinsic value on an ITM short call is LESS than the dividend amount. And why? Well, it would only make sense that the ITM call owner would want to exercise their option in order to benefit from the dividend associated with owning the stock
Are You at Risk of Stock Assignment When Selling a Naked Put
Once again, similar to selling a naked call, when you sell a naked put, if your option expires in the money at expiration, you do not have control over an assignment.
What does this mean for you? You will be assigned 100 shares of stock at the options strike price if your short put is in the money at expiration. And don’t forget the assignment fee and commissions.
Like the example above with your friend Amanda, if you sell her a naked put that is expiring in the money, she has options.
If Amanda chooses to exercise those options, you need to buy 100 shares of FB stock for each of her option contracts, at $525 a share - even if you don’t have the money in your account!
Our stock watch lists have options trades on there with alert setups.
Are You at Risk of Stock Assignment When Selling a Call/Put Spread
Assignment risk happens when your short strike expires in the money.
If you sell a put or call spread, the assignment risk stems from your short strike expiring in the money at expiration. If this scenario happens, you will be forced to sell 100 shares to the buyer for each option contract they purchased.
Likewise, if you sell a put spread you will be assigned 100 shares of stock per contract if the short strike is in the money at expiration.
On the flip side, however, if both strikes expire in the money, they will cancel each other out. Even though the short strike is assigned, you can turn around and exercise the long strike.
What Are the Two Ways to Prevent Assignment
Are you at risk for stock assignment? You don’t want to be hurt financially if the assignment happens. So it's wise to avoid this situation to the best of your ability. In my opinion, you have two avenues to avoid assignment:
- You close the trade before it expires which means you take any profits or losses
- You can simply roll the trade to extend the days to expiration. What this does is give you more time for the trade to be profitable.
Despite your best efforts to avoid unwanted assignment, it can occasionally still happen. So if you find yourself in this situation, here's what to do…
There are two things you can do if you sold an option that has expired in the money.
- You can hold the long or short stock or buy/sell the shares back for a profit or loss. In this scenario, you will need the money in your account to pay for the shares.
- If you were assigned shares and didn't have the money to cover the shares you were assigned (a.k.a. a margin call), immediately buy/sell back the shares. Before the end of the trading day, your broker will do it for you if you don't.
Are You at Risk for Stock Assignment Key Takeaways
- As an options seller, you have no control over the assignment or its timing
- The options buyer controls when an assignment happens.
- If you do not have enough money in your account to cover either your long or short stock position, be wise and immediately close your position. Your broker will do it for you if you fail to.
- Spreads are one way to have protection against being assigned, but, BOTH legs need to be in the money if you are to be protected.
- Additional assignment risk happens if you have a short call position that is in the money at the time of the dividend.
Are You at Risk for Stock Assignment and How Trade Options Smarter
The best defense against early assignment is a good offence; so be prepared and factor it into your thinking early.
Otherwise, it can cause you to make defensive, in-the-moment decisions that are less than logical. This is because the assignment can happen pretty easily if you are not monitoring your positions regularly. Sometimes it can even happen if you are.
If you're anything like me, you get busy during the day and don't get a chance to check your positions. Worse yet, you're trading options on an illiquid underlying.
You might find yourself in a position without any buyers/sellers available so you cannot close your position. So my point is this; monitor your positions closely and watch liquidity closely.
Bullish Bears stock training will help you not only trade smarter but provide you with tips to make your trading journey simpler. Trading options doesn't have to be difficult, and we can show you how.