lystn

Hey everyone, Kirk here again and welcome back to the daily call. On today’s call, we are going to answer the question – “How can I tell if I’ll be assigned trading stock options?” I think this is a big fear for people especially when you get started in option selling which is mainly what we do where we sell straddles or iron butterflies or iron condors. People often fear being assigned stock. Now, first of all, it’s not as bad as it seems. Yes, it will happen. It’s going to happen at some point in the future if you do want to be in this business long term which I assume you do if you’re listening to this podcast and you just have to realize that it is going to happen. Now, we’ve got a lot of case studies on the website, we’ve got a lot of training on how you can manage it and some examples of positions where we’ve been assigned and we’ve managed it. It is not always bad. In fact, a lot of times, it ends up being really well being assigned the stock. If you can deal with it, it’s definitely something that works out really well. The question again is – “How can I tell if I’m going to be assigned? If I know it’s going to happen, how do I know? Or maybe, what indicators are there that I’m going to be assigned?” The first thing you have to understand about assignment is that it is random. As the option seller, it is the choice of the option buyer to exercise their contract or not. Now, the option buyer will typically do this. I say “typically” because they’ll typically do this closer to expiration. Now, why is this? Why do option buyers generally wait until expiration? The reason that they do is because at expiration, the option contract trades closer to parity which means it trades closer to the actual intrinsic value of the stock to the strike price relationship. Now, anytime before that, then the option contract has time decay and volatility built in. If the option buyer were to exercise that contract, they’d basically be giving up that premium that they would’ve otherwise gotten if they just flat out bought or sold back the contract in the market. That’s why they don’t do it until closer to expiration because there’s all this time premium and volatility premium baked into the option price. If they exercise now, they’re giving up that extrinsic value that’s left in the contract which they typically won’t do. This doesn’t mean obviously that you can’t get a random assignment before that. Oftentimes, maybe two weeks before or a week before expiration, we get a random assignment. It happens for sure. But it is absolutely the exception. It’s not necessarily the rule to what happens. Most assignment… You can go back to some of our podcast where we talked about this on our weekly show with the OIC. We go in there. We look at their research and their data. It looks like most of the assignment actually happens the week of expiration and even more of that assignment happens later in the week of expiration. If you manage your positions early, like five or six days before expiration, it’ll generally be fine. Some other things you want to look at and just to be aware of and cognizant of is obviously, you’re going to have a higher likelihood of being assigned if your option is deep in the money. If you for example, sold a 100 strike call option and if the stock is now trading at 110, your call option is now $10 in the money. Now, at that point, you’re getting closer to expiration or you’re a couple of weeks out. There’s a higher likelihood that you’re going to be assigned because there’s probably not too much extrinsic value. The option contract as it goes deeper in the money starts trading more and more on just pure intrinsic value or just like the parity value of the option contract. Those option contacts that are deeper in the money have a higher chance of being assigned. Now, that also doesn’t mean that as soon as your option contract goes in the money, it’s going to be assigned. In fact, lots of our contracts sometimes go in the money or out during the month as the stock fluctuates. It doesn’t mean that you’ll automatically be assigned. The other thing you want to look at as you get closer to expiration is you do have the ability… Most broker platforms, I know Thinkorswim and Tastyworks and some of the other ones, Interactive Brokers and all these other ones actually do have the ability to look at the actual extrinsic value versus intrinsic value of an option contract. What you want to be aware of there is that as your extrinsic value or the time or volatility value of the option contract goes down and starts approaching zero, then your risk of assignment obviously starts creeping up. As the option contract starts losing all of its time value that’s left, starts trading closer to its intrinsic or real value if it were to be exercised by the option buyer, you have a higher chance of being assigned. Again, it only happens closer to expiration week, so it’s something you want to monitor. If you’re looking at a short option contract and the extrinsic value or volatility value is like $30, it probably still won’t have a high likelihood of being assigned. But if it’s $2, maybe the option buyer might give up that $2 in order to collect the stock. That’s another thing. The last thing that you want to look at is dividends. Dividends obviously come up in the middle of the month. That’s something that we’ve talked about before on the podcast here. Also on our weekly podcast and on the website, there’s a lot of different examples of how to not only figure out if you’re at risk of assignment with dividends, but also showing you a bunch of examples. You can just search like “dividend assignment” or “dividend risk” on the site and find those. But when a dividend gets paid, that really is going to affect short call option sellers. You’re not going to really be affected as a short put option seller. But short call option sellers, if you’re in the money and the dividend is coming up, it might be something that you need to be worried about. What I usually do is I usually just setup alerts for everything that we’re trading to just let me know from the system when a dividend is getting paid, so I know, I get an email and it’s top of mind. I don’t have to track it or always monitor it all the time. It’s a really easy way to streamline your process. I know this one was a little bit longer today, but actually, these are still pretty short podcast anyway. But hopefully this helps out and eases your fears or your nerves about being assigned or how it works. As always, if you guys have any questions, let me know. Until next time, happy trading!