Early assignment

If you are a writer and/or or combo player, what kind of strategies do you use to circumvent early assignment?

 

You can't really "circumvent"...just be sure that you have the risk factor in your valuations when selling....and watch closely around x-dividend date....

We get 50 or so a week....I'm surprised when we don't get some around x-date...I figure that's just extra "free money"....

Don

 

Thanks for your reply Don... by circumvent, I mean avoid... do you have any approaches to cover prior to assignment, by coming to some formalized probability as to the near-term risks of assignment?

Also, how much of the stuff that you get assigned is naked versus one block of a limited risk combo?

 

We are rarely "naked" - and get our assignments an hour before the opening so we have a chance to cove...

Don

 

I use european styled index-options with cash-settlement. Early assignment is not possible. But on the other hand margin requirements can be quite tough ATM or ITM...

Best

Sahmi

 

Has anyone tried to capture the dividends by writing calls just before (& going long stock) when it is optimal to exercise?

(In hopes that the buyer does not execute)

 

Option buyers seldom exercise early. They usually just sell the contracts to take profits. For example, I sold some QQQ options expiring within two months, which later became at least 4 points in the money. Nothing has happened. In addition, I have been constantly writing options for 18 months already. So far no early assignment yet.

If the options are 20 or 30 points in the money, it may be a different story. That happened to a friend of mine. He sold some Put Leaps, when JDSU was at 80. Then, the underlying tanked like a rock. He was assigned long before expiration. However, if he were a trader, not an investor, he would have cut his loss by buying back the Leaps before the assignment.

 

That happens in MO all the time.

But remember that this position has the same characteristics as selling naked puts.

 

Historically, approximately 30% of existing option positions expire “long at expiration” with little or no value. Approximately 60% of option positions are opened and subsequently closed during the term of the contract. And, only about 10% of all options are exercised.

Interesting statistic from the OIC...

 

It happens in MO? Does that mean people use this strategy successfully or there is early execution?

Short call/long stock should be pretty close to delta-neutral if the option is significantly in the money, which is generally necessary if you want to sell calls where it is optimal to exercise early. So there shouldn't be much exposure.

As for buying a put to capture the dividend, the requirements for profit change:

• 
  With long a put: You profit only in the case where the put is mispriced for maturity.
  
  With short call: You may profit in the case where the option is correctly priced (for executing just before the dividend), and rely only on the weaker assumption that there exists a sufficient probability that the option will not be exercised.