Assignment Risks of Writing ITM options

Discussion in 'Options' started by earth_imperator, Aug 5, 2022 at 2:45 PM.

  1. It's usually said that the early assignment risk for option writers is the highest if the option's current value is ITM.

    But what if I write an option that is already ITM, maybe even deep ITM ? :D
    So, the above saying cannot be true, as it does not make much sense, IMO.
    Therefore there must instead be another factor that primarily determines the early assignment risk, not the moneyness (here ITM) of the option.

    What is it? Is it the PnL%? At what stage of the PnL% does it get critical for the writer?
    Or is there perhaps an additional or other factor(s) playing a role for such an early assignment?

    BEWARE: I of course mean the risk of early assignment, not the standard assignment at expiration!
    Last edited: Aug 5, 2022 at 3:12 PM
  2. ffs1001


    With respect @earth_imperator, pls learn about intrinsic and extrinsic value, and quickly! That is the most fundamental concept in options. This is what determines whether your ITM option will be assigned or not - basically, in a nutshell, if your short option has very little time value left (lets say like 0.05), then you risk assignment. On the other hand, if you have a deep ITM option which expires in 1 years time, it will likely still have a lot of time value and you will be safe.

    There's also the added complexity of whether there is a dividend coming out soon or not.
  3. Do you have anything constructive to say?
    What is it you don't understand in this topic?
  4. Robert Morse

    Robert Morse Sponsor

    I'm not sure how you define risk with a buy-write from early assignment, as the faster this gets called away, the better for you, as that is max profit. Your risk is the stock dropping. If I'm long an ITM call, I would exercise early if there was a large dividend greater than the value of the put on the same strike or if the stock is very hard to borrow and I had short stock vs the long call and the cost of the short was too great with little put value. I hope that helps.
    ondafringe likes this.
  5. The brokerage firm TradeStation writes this:
    In-The-Money Early Exercise

    The chance of early assignment happens most often when the options are in-the-money (ITM), and although it is unlikely, even an option that is out-of-the-money (OTM), under certain circumstances, could be assigned at expiration.

    Such info is IMO wrong and misleading, and that's the very reason I opened this topic to find the correct answer.
    Last edited: Aug 5, 2022 at 3:13 PM
  6. Robert, what on hell is a "buy-write"? Never heard this combination yet. Is it real or just a typo maybe?
    I of course mean standard option writing, ie. short-selling Puts or Calls.

    Hmm. IMO the other side exercises only if he/she makes profit, so then his/her profit making means I lose. Therefore your above statement IMO cannot be true. Unless I misunderstood you.

    Hmm. thx. but IMO distracting from the core problem, unfortunately confusing with such many overloads of unnecessary things (like stock borrowing etc). Sorry to say.
    Last edited: Aug 5, 2022 at 3:41 PM
  7. Robert Morse

    Robert Morse Sponsor

    Are you shorting naked calls?

  8. Robert Morse

    Robert Morse Sponsor

  9. Does it in this case really make any difference?
    B/c the counterparty has no clue about my situation, ie. whether my position is covered or naked.

    But for the sake of the discussion: I primarily mean CashSecured Put,
    ie. ShortPut plus cash collateral for the Strike.
  10. Look what OIC says to CashSecured Put:
    Assignment Risk
    Slight. Since the goal of this strategy is to acquire stock, assignment is not a problem. However, early exercise would require the investor to convert the interest-bearing asset to cash in order to pay for the stock.

    Also, if assignment happened during a particularly severe downturn and the put writer has second thoughts about owning the stock at the strike price, the delay between assignment and notification means that the stock could fall further before the investor can act to limit losses. This is one reason why all option writers have reason to monitor the underlying stock very closely.

    And be aware, a situation where a stock is involved in a restructuring or capitalization event, such as a merger, takeover, spin-off or special dividend, could completely upset typical expectations regarding early exercise of options on the stock.

    Man I don't get it! How can the OIC say that the early assignment risk is "slight"?
    IMO, another wrong info about this topic!
    B/c it's up to the counterparty: if he/she would make a significant profit then he/she would exercise it, which means I get assigned.
    Therefore one cannot simply say the risk is just "slight"!
    Maybe they mean something different than what I do understand under assignment...
    Last edited: Aug 5, 2022 at 4:14 PM