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Q: I was assigned on my March 40 put option when the stock value went below $38, even though it wasn't expiration. On another stock, I had a covered write position where I was short a 70 call which went in-the-money by $7, and the call wasn't assigned until expiration day. How can I tell when I will be assigned?
A: The short answer is that you can never tell when you will be assigned. Once you sell an option (put or call), you have the potential for being assigned to fulfill your obligation to receive (and pay for) or deliver (and get paid for) shares of stock on any business day. In some circumstances, you may be assigned on a short option position while the underlying shares are halted for trading, or perhaps while they are the subjects of a buyout or takeover. To ensure fairness in the distribution of equity and index option assignments, The Options Clearing Corporation utilizes a random procedure to assign exercise notices to the accounts maintained with OCC by each Clearing Member. The assigned firm must then use an exchange approved method (usually a random process or the "first-in, first-out" method) to allocate those notices to accounts which are short the options.
Having said that, there are some generalizations which might help you understand when you might be more likely to be assigned on a short-option position.
- Only about 10% of options end up being exercised; the percentage hasn't varied much over the years. That does not mean that you can only be assigned on 10% of your short option, however. It means that, in general, option exercises are not that common.
- The majority of option exercises (and the corresponding assignments) take place as the option gets closer to expiration. Without getting into the math too much, it usually doesn't make sense to exercise an option, which has any time premium over intrinsic value. For most options, that doesn't occur until close to expiration.
- In general terms, a put which goes in-the-money is more likely to be exercised than a call which goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. People are more likely to exercise options if it means they can receive cash sooner. The opposite is true for calls, where exercise means you have to pay cash sooner.
The bottom line is that you really don't have any sure-fire way to predict when you will be assigned on a short option position; it can happen any day the stock market is open for trading.
Q: How could I be assigned if my covered calls are in-the-money?
A: The option holder has the right to exercise his or her options position prior to expiration regardless of whether the options are in- or out-of-the-money. You can be assigned if an investor or market professional holding calls of the same series as your short position submits an exercise notice to his or her brokerage firms, which in turn, submitted an exercise notice to The Options Clearing Corporation (OCC) (or if the brokerage firm is not an OCC Clearing Member, then it would submit the notice to a firm that is an OCC Clearing Member, and that Member would then submit the notice to OCC). OCC randomly assigns exercise notices to Clearing Members in whose accounts have short positions of the same series. The Clearing Member then assigns the exercise to one of its short positions using a fair assignment method, though not necessarily random. You should ask your brokerage firm how it assigns exercise notices to its customers.
Q: If I am short a call option (on a covered write) and I buy back my short call, is it possible for me to be assigned (and the stock position to be called away) that night?
A: No, it is not possible. The assignments are determined based on net positions after the close of the market each day. Therefore, if you bought back your short call, you no longer have a short position at the end of the day, and therefore no possibility of being assigned.
Q: I sold short 10 options contracts recently. Unfortunately, I was assigned early on each contract, one at a time. Couldn't all the contracts have been assigned at once?
A: The exercise of an option prior to expiration is solely at the discretion of the buyer. The option buyer can also decide how many contracts in a multi-contract position to exercise at a given time. Once an exercise notice is tendered, The Options Clearing Corporation randomly selects for assignment a member brokerage firm carrying a short position in that series. The brokerage firm may, in turn, assign the notice randomly, or on a "first-in, first-out" basis. Regardless of what method is applied by the brokerage firm, equity options writers are subject to the risk each day that some or all of their short options may be assigned.
Q: What time each day does the Clearing Firm receive information regarding assignments etc... from OCC?
A: OCC's Clearing Members can submit exercise notices, on a daily basis, up to 7:00 PM Central Time, and in general each Clearing Member will establish its own (earlier) deadline for its customers. (There is a different set of procedures for expiring options.) As part of its nightly processing, OCC randomly assigns its Clearing Members based on the days exercises. This processing is completed at approximately 1:00 AM Central Time. OCC transmits the assignments to its Clearing Members and as part of the Member's nightly processing, they allocate the assignments to their customers on either a random basis or a first in - first out basis.
We understand the exchanges� rules are that customers should be notified of assignments in a timely manner. It is best that you and your broker determine what constitutes �timely manner� beforehand: Does �timely manner� mean a call the morning of the assignment? Is there an update to your account that you can view online? Will you receive a letter in the mail?
For expirations, OCC process all exercise/assignments on Saturday. OCC's processing is completed and transmitted to its Clearing Members late Saturday night. Clearing Members will process expiration exercises and assignments on Sunday and then notify their customers the next business day. Once again, you can probably get an approximation from your broker.
Q: I recently wrote a call option. At the market close of expiration Friday, the stock was .41 cents in-the-money. I know that calls are automatically assigned when they are at least .75. cents in the money. Is there is a way that I can avoid being assigned?
A: The Option Clearing Corporation's auto exercise threshold is 75 cents (.75) in the customer account. The automatic exercise threshold in firm and market maker accounts is 25 cents (.25). An option holder has the right to exercise their option regardless of the price of the underlying security. Is there a magic number that ensures that option writers will not be assigned? The answer would be 'NO'. Although unlikely, an investor may choose to exercise a slightly out of the money option or choose not to exercise an option that is in the money by greater than .75 cents
A good rule of thumb might be, "when in doubt, close them out". This would ensure not being assigned on a contract that was barely in or out of the money.
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