assignment risk on writing american options

Discussion in 'Options' started by cpphey, Aug 14, 2019 at 10:49 PM.

  1. cpphey


    Writing american options carry the following risks

    1. They expire out of money
    2. They are traded out of it before expiration
    3. Some of them are exercised i.e. you get exercised.

    My concerned is what if you get assigned to them before expiration. What are the chances of this happening before expiration for major indexes or large stocks ?
  2. Any time you write an option, you're open to assignment. Period. But it's not a "risk" unless you define profit as risk. Example from today:

    SPY @284.75 -280P 9/16, 5.25cr

    Let's see what would have happened if I got assigned on this the moment I sold it:

    1) I get to keep the $525 without waiting till expiration. All my risk got taken away, for free - shweet!
    2) I got assigned at $280, SPY is at 284.75 - that's another $475 in my pocket. OK, less the $15 assignment fee... gee, hurt my feelings some more.
    3) I immediately sell another one of the same, and hope it happens again.

    (Optional: I publish an open love letter to the option holder that ends with "...after the first 1,000 lots, the hookers and the blow are on me.")

    Was there some specific negative scenario related to assignment that you were concerned with?
  3. cpphey


    @BlueWaterSailor I mean the following

  4. My point was that exercise in itself is essentially meaningless - your risk profile doesn't change much at the point where it happens. Whether you end up in profit or loss depends solely on the price movement; the conversion from a cash position to one in stock is immaterial.

    If you don't have the cash to cover, then your stock position will be liquidated (usually, you have the option of doing so yourself for some limited amount of time; it's worth a phone call to your broker to find out the exact details.) Again, depending on price movement, you may gain or you may lose when that happens... and this is, yet again, irrelevant to whether there was an exercise involved.

    If you are afraid of assignment - which means that you really don't understand it - I would suggest that you avoid trading until you do understand it. Neither the process nor the results involved are particularly complex, and it's not some horrible awful evil thing that will take all your money and make people laugh at you until you die of shame; it's just a normal part of trading.

    I will note that it's not very common, and can often (usually) be avoided if that's what you want. But if that's what you want every time and regardless of circumstances, then that's yet another sign that you need to understand it better.

    (If you're afraid of it because all you've got is a couple of bucks in your pocket and you're looking to make tiny bets with tiny maximum losses - which is characteristic of several binary options "traders" I've known - then staying away from American-style options is a good idea in general. At least until you understand the quite different dynamic and the risks/rewards that are involved, and consider the entire package to be worth your while.)