>> See Trade History <<

Home
Live Trading
Weekly Superstars Daily Power Plays
Tools
Market State Indicator Quantum Flo Bias (QFB) Indicator Multi Market Signal Indicator
Market Insights
Learning
Option 101 What is Market Making How to Place an Options trade Position Size and Risk Management Pattern Day Trader Rule How to Handle Options Assignment
Blog About
(702) 518-0915

How to Handle Options Assignment

A common question from new traders is how do option exercise and assignments work? Options assignment occurs when the option seller/writer is obligated to fulfill their contractual obligation, and for Call options, the option buyer/holder exercises their right to buy the underlying asset, or for Put options, sell the underlying asset at the specified strike price. How you handle options assignment depends on whether you are the option buyer/holder or the option seller/writer. There are several ways to manage option assignment as outlined below:

For Option Buyers/Holders:

  1. Cover the Position:

    If you're assigned on a call option, you may cover the position by purchasing the underlying asset at the market price.

  If assigned on a put option, you may cover the position by selling the underlying asset at the market price.

  1. Close the Option Position:

    Another option is to close the option position by selling the call or put option in the market before it expires. You may do this if you don't want to    take a position in the underlying asset.

For Option Sellers/Writers:

  1. Fulfill Your Obligation:

    If you're assigned on a call option you wrote, you must sell the underlying asset at the agreed-upon strike price.

    If assigned on a put option you wrote, you must buy the underlying asset at the strike price.

  1. Have Sufficient Capital:

    You must ensure you have enough capital in your account to fulfill your obligations. If not, you might need to close out the position or adjust your strategy.

  1. Close the Position:

    You can also close out the position by buying back the call or put option in the market prior to expiration. This might be a preferable choice if you want to avoid taking a position in the underlying asset.

  1. Roll the Position:

    In some cases, you may choose to "roll" the position by buying back the option that was assigned and simultaneously selling another option with a different expiration date or strike price. This can be a strategy to manage risk or capitalize on changing market conditions.

  1. Evaluate Tax Implications:

    Keep in mind the tax implications of the assignment, as it may trigger capital gains or losses.

General Tips:

  1. Understand Your Obligations:

    Know your obligations as an option buyer/holder or seller/writer. Understanding the terms of the option contract is crucial.

  1. Monitor Positions:

    Regularly monitor your options positions, especially as expiration dates approach.

  1. Have a Plan:

    Have a clear plan in place for how you will handle options assignment before entering into any options trade.

  1. Stay Informed:

    Stay informed about corporate actions, dividends, and other events that may affect options contracts.If you're unsure about how to handle options assignment or need personalized advice, it's recommended to consult with a financial advisor or speak with the customer support team of your brokerage platform for guidance specific to your situation. 

JTNC’s Quantum Flo currently trades SPY, QQQ and IWM options and the underlying assets for these are ETFs with hundreds of stocks. If you are assigned, for each option you own/hold, you will receive 100 shares of the underlying ETF. Let’s look at a few examples.

  1. Buy a $450 Call on SPY expiring the same day. The Quantum Flo service typically trades at the money (ATM) or in the money (ITM) options. That means when we recommend the purchase of a Call, in this example price will typically be at $450 or perhaps higher. If price drops below $450 and you hold the Call until the end of the day, it will expire worthless and the premium you paid for the Call will be lost. In this instance, JTNC will typically tell you to cut your losses and sell the Call option before expiry to recoup some of the premium paid. If however price increases to $451 and you hold to expiration, you will be assigned 100 shares of the ETF SPY at a cost of $450. You must have $45000 in your account to hold this position overnight, otherwise your broker will liquidate this position at perhaps a worse price than what you paid. Given the closing price was $451 and you own the ETF at $450, you could either sell the Call option prior to expiration for @ $100 profit ($1 * 100 shares) or you can take possession of the shares and then sell them in the open market, again for more or less depending on how price reacts after you are assigned the shares.
  2. Buying a $450 Put on SPY expiring the same day is handled in the same way as a Call except in reverse. For example, if price rises to $451, the $450 Put will expire worthless and you will lose the premium you paid for this Put option. Again JTNC will typically tell you to cut your losses and sell the Put option before expiry to recoup some of the premium paid. If however price drops to $449 and you hold to expiration, you will be assigned a short position of 100 shares of the ETF SPY at a sale price of $450. This will add $45000 in income to your account. Brokers deal with short positions differently depending on the broker, however you will still be required to have sufficient capital in your account to hold this short position overnight. Speak with your broker to understand their rules regarding short positions. Again given the closing price was $449 and you sold the ETF at $450, you could either sell the Put option prior to expiration for @ $100 profit ($1 * 100 shares) or you could go short the shares and then buy them back in the open market for more or less depending on how price reacts after you are assigned the short position.

As the buyer/holder of an option, you are in control of whether to exercise the option or to sell the option prior to expiry. JTNC recommends closing all trades prior to expiration to avoid assignment as there may be additional brokerage fees associated with options assignment, as well as the risk of an ever-changing market. Holding shares overnight either a long or short can and will likely move significantly from your entry price. This can be in your favor or against.   

That said, while all JTNC services recommend closing trades at predetermined prices, there may be an occasion where you wish to own the underlying ETF. For example, you purchase a Call option on SPY at X and you believe it will trade up to a multiple of X over the next several days. You may elect to exercise the Call option to obtain 100 shares of SPY per option position. Remember should you choose to exercise the option, you will need sufficient capital to own/short 100 shares of the underlying security.

JTNC will soon be introducing more complex options trading structures which will include option writing for premium, as well as strangle, butterflies and condors. Understanding different options structures and how options are exercised and assigned is critically important to protecting your account and becoming an effective and profitable trader. At JTNC we are here to help guide you through this process to become a more effective and successful trader.