In this post, we’re talking about the option assignment.
I’ll give you my thoughts and insights about option assignment as well as somebody who got into a difficult situation with the option assignment.
The thing is it does happen.
Here’s this week’s question:
“Hello Sasha, this is Greg. My question has to do with what to do when you assign the stock when placing a calendar trade. A couple of weeks back, beyond me, the stock price was around 152. I ended up finding some 135 calls for 24 cents. It was sell the 9/27 by 10/18. This was a 37-day trade.
Within a week, I was assigned the stock, and I didn’t know what to do. My account had this hundred and something thousand dollar position. I called TD Ameritrade. Long story short, they told me to exercise my option my October option, and it’ll cancel out the 1000 shares I’m short.
I want to know is there something that could have been done better. As far as maybe either making profit out of this lessening my loss.
Thank you. I look forward to hearing the answer.”
Sometimes when you’re doing this, it’s difficult to guess what’s happening on the audio then what the real position is. Plus, I’m also recording these usually a week or two later.
I’m going to give you my insight as far as based on the information that was given. Of course, the situation might be completely different, so I’ll give you some general ideas and things to think about.
That goes for other people who are listening to this video as far as the assignment goes. I don’t know your situation. I don’t know what happened during your assignment.
This is why you have a broker you can call and ask them questions. And it’s also one of the reasons why you also have that extra buying protection that you do when it comes to trading options.
We have Beyond Meat, $152 was the stock price.
You sold the 135 calls. And if the stock price is $152 and you sell a $135 call, this is already in the money. And that’s a problem. This is where you typically get assigned. It’s when you’re trading things in the money.
And, weirdly, you got assigned seven days later. That’s weird because usually, the assignment stuff happens like the last week and so on. But you’ve got to sign seven days later. And it’s probably because you were trading in the money.
This is my assumption from the looks of what the prices were given 152, and you sold the 135. It seems as if you sold things already in the money, and you bought the 10/18 for protection. Now, these 10/18 $135 calls from my notes what it seems like you paid or the cost of the trade was about 24 cents.
This is a debit because it’s a calendar trade. The question is, what do you do in these situations?
Well, here’re two main tips.
Tip #1
Anytime you’re short, you can get assigned. And more importantly, anytime you’re short in the money, especially, this is when you get assign. This is the legal basis. Anytime you’re short in the money; you’re going to get assigned.
Tip #2
A lot of people like to trade a couple of things – SPX and RUT. And SPX and RUT it’s cash-settled. There is no assignment. If you want to trade and avoid earnings, you can still get assigned to these. Let’s say like DIA, EEM, IWM –these are no earnings.
You’re always looking to how do you reduce risks. That’s because you’re talking about less loss or more profit. At that point, once you’re assigned, you’re already assigned.
This is why you had these calls. It’s for that reason – to protect yourself. That’s the bottom line. And usually, people that go like let’s say 37 days out they may hold it for two weeks or about half the duration. Let’s say 20 days here since that’s almost forty days. And then you get out of the position. In your case, you held it for seven, and you had an assignment.
This is my guess. This was started in the money, and it continued to go against you. And with such a low debit at 24 cents, you got assigned.
Anytime you get assigned, there are more commissions.
If you don’t have the money, it is big. But if you do have the money, you get assigned, you bought the stock, or you got the stock. And then the next day you sell the stock. It’s liquidated. Sometimes the broker forces you to do this. Or they give you a margin call like a couple of days to do it to make it happen.
If I’m trading anything in here and I’m short, this is already in the money.
The reason I think this was started at or in the money because it’s 24 cents. Now the stock price is $155 before it was 152.
The 135 were sold about 37 days out. Let’s see if we can find about 35 days out. Let’s see if we can do the 135 – see what that looks like. Sell a single, and here’s our trade.
We sell a single right there. That means that I’m already in the money. I’m selling this one. I need it to go the other way. Here I’m setting up to protect myself because of this continued downside. So what do I do? Well, we went 10/18.
The next one was about let’s say this November, and we’re going to go 135 here. Buy a single, analyze the trade.
What kind of trade does this give me?
If you look at it, it’s a funky little trade. I got the 135 – sell one buy one. And let’s make sure I understood everything reset (volatility).
Let’s see why this looks so funky. Let’s buy a calendar. And we have the calendar on selling the October 25th. Buying the November 19th, and it’s only five cents right now. That’s the issue.
It’s very similar trade – you had 24 cents. I’m going to try to bump this up to let’s say 140. And even then, the price is not perfect. Let’s say 145. Okay, so negative 0.55 calls or so. I mean I can’t get the perfect pricing here. But you see what’s happening.
I’m risking like $10-$20, and I’m in the money to potentially make like $200. And this would work out great. But if this stock price continued to move this way, I’m deeper in the money.
Again, this is just an assumption. But I’m short. I’m short right here. And I’m in the money. Let’s say we do 150 because right now, stock price about 155. All of a sudden, this has a different picture.
And you can see that it doesn’t look as funky. And that’s what happens when you’re trading things in the money. You get that problem or issue that occurs.
I’m at 50 cents.
What happens is you believe it will go down, but the stock price keeps going up. This becomes just deeper and deeper in the money.
Let’s say I would have done a put. A put cost me a lot more money. This cost me about $1000 to put on.
Whereas if I would have done a call, you can see I’m putting on trade cost me about $32 to make 180. But I’m not the money.
With a thousand, I could make about $500.
But I’m not in the money. There are trade-offs. This is the thing you have to be aware of.
The number one is, are you starting things in the money. If you are and it continues to go against you, then, of course, you’re already in the money. Now in some situations, this could be interesting.
I’ll show you an interesting situation where this could be beneficial. Here’s a back ratio spread where you do one of these in the money to offset the risk.
Now I have 170, 165, so I flattened my risk curve, but I have this dip, and then I have unlimited risk.
In some situations where I have a 165 right there, but the current price is 155. So far, so good.
What you can do is when you’re a short one, and this goes in your favor because you want it to go up while you’re offsetting the risk by selling one. And if it goes to 170, which you want it to explode at 200 while you’re 165 then becomes in the money.
But your other ones (because you have two of them) offset that risk and problem. In that case, it sounds interesting with a back ratio. This is what a lot of traders don’t like. When you’re in the money, you can get assigned.
You could trade the SPX or the RUT. And number two, stay out of the money. If you’re starting it in the money, don’t start it in the money.
And number three is typically you’re not getting assigned until like the last week of expiration. If you got that quick of an assignment, then something was weird, wacky, or it moved against you.
Within seven days, your premium falls off. People who ultimately have these contracts and they’re worth something like let’s say you bought some insurance – well, you might as well keep it towards the end and then use it the last couple of days if that’s what you need to do.
Otherwise, if it’s not worth anything, then it just expires because I bought the insurance. But if my insurance is worth something, do I have to use it right when it kicks in?
No. People will hold on to it because they’re insured. That’s why they’re buying it. I might as well hold on to it because I’m insured, and then they’ll use it like a week before the expiration.
That’s a few things that you might want to think about.
Let’s say you’re trading 40 days out. Well, you might hold the contract for 20 days.
In this case, this was only able to be held for seven days. It makes me wonder how deep in the money were you. If you do get assigned, and once you get that assignment, you have that assignment risk and problem anytime you’re short.
But if you get assigned, this is why you have that other one for protection.
And typically, go ahead and you turn around and use that to compensate for it. A lot of times, the broker will give you a margin call if you don’t have enough money to get the funds there or to sell the contracts. Even if you were let’s say negative $102,502 and then you sell the stock for $101,209, there is around $800 difference.
It depends where the stock opens and closes, of course, all those factors play into consideration.
The difference is not huge. It might be a little less a little more. But the point being is that the difference usually is not big of a deal unless you get like a significant movement in the price.
Of course, you might not have the money. And that’s where people freak out. But that’s why they give you a couple of days you sell it, liquidate it, and you’re done.
Those are my thoughts and tidbits.
Number one – don’t trade in the money or start things off in the money.
Number two – trade things that have a little longer duration.
If you’re trading like six, five days duration, you can get assigned pretty quickly. If you have a low premium (let’s say you’re trading the call side and it’s like a tiny amount of premium), those things have a higher chance of being assigned. That’s because people probably want to use up their way in the money. They’re going to use it up.
Number three – And if you want to avoid it, you could trade the SPX or the RUT and then not deal with it at all.
Every person’s situation is different. Your situation might be different. Your trading might be different. Also, your style might be different.
That’s why we’re doing coaching calls. If you’re interested in a coaching call, you can always reach out here.
We can go over some things in more detail for anyone interested. That allows me to look at things and explain things in multiple ways.
Anytime you’re short, you can get assigned. It doesn’t matter; it’s a calendar or a butterfly. Anytime you have a negative one; you’re short. And especially if you’re in the money, that’s increases your chances.
You’re short; you’re in the money your contract can be fulfilled. It comes down to in the money. TD Ameritrade will put a little yellow icon (ITM).
