So I'm building these double diagonals on TSLA where eventually one of the short legs will move ITM putting me at risk for early assignment. My question is: what is the real risk of assignment when the position has 30 days left of extrinsic value? And has anyone been unexpectedly assigned on a Friday only to get their teeth kicked in Monday morning as you might with a Wild West stock like TSLA?
Typically, early assignment risk comes from ITM calls with a dividend in the next day, and the math makes owning the stock better than the option. It can also happen with very hard to borrow stocks where the short stock is expensive to carry or there are buy ins.
What's the actual position you're looking at? Circumstantially you're unlikely to get assigned on this one because it's got no dividend and lots of volatility--so whoever is long would be giving up whatever (presumably substantial) extrinsic value. And if it's gone so far ITM that it does make sense to exercise, then your long would be too (and worst case, you exercise). There might be some margin exposure here (is a covered call / married put still subject to 50% / 25% margin--or just the spread?). Bob Morse would know this one, no doubt.
I’m more of an expert on PM than reg-t. Not sure what is required if you get assigned and that stock causes a call, besides closing the following day to close out without a call.
You are short a call which means if you have a counterparty that’s is delta hedging they would be short the stock against it. If the stock is hard to borrow and is bought in, the delta hedger is likely to cover his short by early-Xing the call. For a normal stock, back of the envelope calculation would be to look at the price of the put at the same strike and compare it to the expected dividend.
There are a few infrequent events where people exercise early: 1) They think that they are receiving income by receiving the dividend so they exercise 2) They want the stock 3) They throw away time premium by exercising 4) Risk Arbitrage, hoping the stock recovers to the pre adjusted ex-div close A lot of web sites as well as people write that if the time premium of an ITM call is less than the dividend then the call will be exercised early. That's not true because there's no arb available to lock the difference. With time premium remaining, there is no incentive for the call owner to execise the call early to acquire your stock because by doing so, he is throwing away any remaining time premium. It makes more sense for him to sell the call for salvage value and if he actually wants the stock, buy it outright. Where the dividend comes into play is if the time premium of an ITM put is less than the amount of the dividend. Then the arb is to buy the put and buy the stock and exercise the put on the ex-dividend date and then receive the dividend on the Pay Date. Because owners of ITM calls do not receive the dividend, they tend to sell before the ex-div date when share price will be reduced by the amount of the dividend. If that selling drives the premium below parity, it presents an opportunity for Discount Arbitrage because the call buyer can exercise the call while shorting the stock, thereby locking in the discount to parity. It may sound like splitting hairs but the dividend doesn't cause the exercise. The arb arises if selling of ITM calls prior to a pending dividend drives the premium below parity - then the arb situation arises. If there is no dividend then any situation where the option trades below parity presents the arb opportunity. For example, suppose I own the XYZ Nov $35 call and with the stock at $40, the call is trading at $4.75 x $5.20. The intrinsic value of the call is 5 points. I could place an order to sell at a better price but no one is likely to give me $5. If no takers at a better price, to avoid taking the 25 cent haircut, I exercise the call to buy XYZ at $35 and simultaneoulsy sell 100 shares per at $40, grossing $5. Why give the MM the opportunity to do this rather than doing it yourself? And now, someone gets assigned and has to sell their stock (or go short). That could be you where the short call of your condor (or other strategy) is trading below parity. One area I'm not sure about is the assignment process of the OCC wheel. I once had some naked OTM MSO calls with a dollar of time premium remaining assigned early. Free money. I covered the stock and immediately re-sold the short calls. I have no clue if the "wheel" process has any specific parameters regarding time premium remaining. It just might have been an error on their part. If not an error then randomness might be another reason for early assignment. Anyone have any feedback regarding this?
So what I'm getting from your thoughtful replys is: an ITM short position as part of a double diagonal on TSLA (which does not have a dividend and is not hard to borrow) is really not a candidate for early assignment, but if it does happen for some odd reason my long position on the other side would offer me some protection until I was able to unwind the whole trade.