risk of assignment

Please upgrade your browser

E*TRADE uses features that may not be supported by your current browser and might not work as intended. For the best user experience,  please use an updated browser .

Understanding assignment risk in Level 3 and 4 options strategies

E*TRADE from Morgan Stanley

With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned , either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a short position can be assigned to you at any time. On this page, we’ll run through the results and possible responses for various scenarios where a trader may be left with a short position following an assignment.

Before we look at specifics, here’s an important note about risk related to out-of-the-money options: Normally, you would not receive an assignment on an option that expires out of the money. However, even if a short position appears to be out of the money, it might still be assigned to you if the stock were to move against you just prior to expiration or in extended aftermarket or weekend trading hours. The only way to eliminate this risk is to buy-to-close the short option.

• Short (naked) calls

Credit call spreads

Credit put spreads, debit call spreads, debit put spreads.

• When all legs are in-the-money or all are out-of-the-money at expiration

Another important note : In any case where you close out an options position, the standard contract fee (commission) will be charged unless the trade qualifies for the E*TRADE Dime Buyback Program . There is no contract fee or commission when an option is assigned to you.

Short (naked) call

If you experience an early assignment

An early assignment is most likely to happen if the call option is deep in the money and the stock’s ex-dividend date is close to the option expiration date.

If your account does not hold the shares needed to cover the obligation, an early assignment would create a short stock position in your account. This may incur borrowing fees and make you responsible for any dividend payments.

Also note that if you hold a short call on a stock that has a dividend payment coming in the near future, you may be responsible for paying the dividend even if you close the position before it expires.

An early assignment generally happens when the put option is deep in the money and the underlying stock does not have an ex-dividend date between the current time and the expiration of the option.

Short call + long call

(The same principles apply to both two-leg and four-leg strategies)

This would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short and simultaneously sell the long leg of the spread.

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date, because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

Short put + long put

Early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

However, the long put still functions to cover the position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.

Here's a call example

• Let’s say that you’re short a 100 call and long a 110 call on XYZ stock; both legs are in-the-money.
• You receive an assignment notification on your short 100 call, meaning you sell 100 shares of XYZ stock at 100. Now, you have $10,000 in short stock proceeds, your account is short 100 shares of stock, and you still hold the long 110 call.
• Exercise your long 110 call, which would cover the short stock position in your account.
• Or, buy 100 shares of XYZ stock (to cover your short stock position) and sell to close the long 110 call.

Here's a put example:

• Let’s say that you’re short a 105 put and long a 95 put on XYZ stock; the short leg is in-the-money.
• You receive an assignment notification on your short 105 put, meaning you buy 100 shares of XYZ stock at 105. Now, your account has been debited $10,500 for the stock purchase, you hold 100 shares of stock, and you still hold the long 95 put.
• The debit in your account may be subject to margin charges or even a Fed call, but your risk profile has not changed.
• You can sell to close 100 shares of stock and sell to close the long 95 put.

Long call + short call

Debit spreads have the same early assignment risk as credit spreads only if the short leg is in-the-money.

An early assignment would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short share position and simultaneously sell the remaining long leg of the spread.

Long put + short put

An early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

All spreads that have a short leg

(when all legs are in-the-money or all are out-of-the-money)

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

However, the long put still functions to cover the long stock position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously. 

What to read next...

How to buy call options, how to buy put options, potentially protect a stock position against a market drop, looking to expand your financial knowledge.

For the Public

FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist.

For Industry Professionals

Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks.

For Member Firms

FINRA GATEWAY

Firm compliance professionals can access filings and requests, run reports and submit support tickets.

For Case Participants

Arbitration and mediation case participants and FINRA neutrals can view case information and submit documents through this Dispute Resolution Portal.

Need Help? | Check System Status

Log In to other FINRA systems

Trading Options: Understanding Assignment

The options market can seem to have a language of its own. To the average investor, there are likely a number of unfamiliar terms, but for an individual with a short options position—someone who has sold call or put options—there is perhaps no term more important than " assignment "—the fulfilling of the requirements of an options contract.

Options trading carries risk and requires specific approval from an investor's brokerage firm. For information about the inherent risks and characteristics of the options market, refer to the Characteristics and Risks of Standardized Options also known as the Options Disclosure Document (ODD).

When someone buys options to open a new position ("Buy to Open"), they are buying a right —either the right to buy the underlying security at a specified price (the strike price) in the case of a call option, or the right to sell the underlying security in the case of a put option.

On the flip side, when an individual sells, or writes, an option to open a new position ("Sell to Open"), they are accepting an obligation —either an obligation to sell the underlying security at the strike price in the case of a call option or the obligation to buy that security in the case of a put option. When an individual sells options to open a new position, they are said to be "short" those options. The seller does this in exchange for receiving the option's premium from the buyer.

Learn more about  options from FINRA or access free courses like Options 101 at OCC Learning .

American-style options allow the buyer of a contract to exercise at any time during the life of the contract, whereas European-style options can be exercised only during a specified period just prior to expiration. For an investor selling American-style options, one of the risks is that the investor may be called upon at any time during the contract's term to fulfill its obligations. That is, as long as a short options position remains open, the seller may be subject to "assignment" on any day equity markets are open. 

What is assignment?

An option assignment represents the seller's obligation to fulfill the terms of the contract by either selling or buying the underlying security at the exercise price. This obligation is triggered when the buyer of an option contract exercises their right to buy or sell the underlying security.

To ensure fairness in the distribution of American-style and European-style option assignments, the Options Clearing Corporation (OCC), which is the options industry clearing house, has an established process to randomly assign exercise notices to firms with an account that has a short option position. Once a firm receives an assignment, it then assigns this notice to one of its customers who has a short option contract of the same series. This short option contract is selected from a pool of such customers, either at random or by some other procedure specific to the brokerage firm. 

How does an investor know if an option position will be assigned?

While an option seller will always have some level of uncertainty, being assigned may be a somewhat predictable event. Only about 7% of options positions are typically exercised, but that does not imply that investors can expect to be assigned on only 7% of their short positions. Investors may have some, all or none of their short positions assigned.

And while the majority of American-style options exercises (and assignments) happen on or near the contract's expiration, a long options holder can exercise their right at any time, even if the underlying security is halted for trading. Someone may exercise their options early based upon a significant price movement in the underlying security or if shares become difficult to borrow as the result of a pending corporate action such as a buyout or takeover. 

Note: European-style options can only be exercised during a specified period just prior to expiration. In U.S. markets, the majority of options on commodity and index futures are European-style, while options on stocks and exchange-traded funds (ETF) are American-style. So, while SPDR S&P 500, or SPY options, which are options tied to an ETF that tracks the S&P 500, are American-style options, S&P 500 Index options, or SPX options, which are tied to S&P 500 futures contracts, are European-style options.

What happens after an option is assigned?

An investor who is assigned on a short option position is required to meet the terms of the written option contract upon receiving notification of the assignment. In the case of a short equity call, the seller of the option must deliver stock at the strike price and in return receives cash. An investor who doesn't already own the shares will need to acquire and deliver shares in return for cash in the amount of the strike price, multiplied by 100, since each contract represents 100 shares. In the case of a short equity put, the seller of the option is required to purchase the stock at the strike price.

How might an investor's account balance fluctuate after opening a short options position?

It is normal to see an account balance fluctuate after opening a short option position. Investors who have questions or concerns or who do not understand reported trade balances and assets valuations should contact their brokerage firm immediately for an explanation. Please keep in mind that short option positions can incur substantial risk in certain situations.

For example, say XYZ stock is trading at $40 and an investor sells 10 contracts for XYZ July 50 calls at $1.00, collecting a premium of $1,000, since each contract represents 100 shares ($1.00 premium x 10 contracts x 100 shares). Consider what happens if XYZ stock increases to $60, the call is exercised by the option holder and the investor is assigned. Should the investor not own the stock, they must now acquire and deliver 1,000 shares of XYZ at a price of $50 per share. Given the current stock price of $60, the investor's short stock position would result in an unrealized loss of $9,000 (a $10,000 loss from delivering shares $10 below current stock price minus the $1,000 premium collected earlier).

Note: Even if the investor's short call position had not been assigned, the investor's account balance in this example would still be negatively affected—at least until the options expire if they are not exercised. The investor's account position would be updated to reflect the investor's unrealized loss—what they could lose if an option is exercised (and they are assigned) at the current market price. This update does not represent an actual loss (or gain) until the option is actually exercised and the investor is assigned. 

What happens if an investor opened a multi-leg strategy, but one leg is assigned?

American-style option holders have the right to exercise their options position prior to expiration regardless of whether the options are in-, at- or out-of-the-money. Investors can be assigned if any market participant holding calls or puts of the same series submits an exercise notice to their brokerage firm. When one leg is assigned, subsequent action may be required, which could include closing or adjusting the remaining position to avoid potential capital or margin implications resulting from the assignment. These actions may not be attractive and may result in a loss or a less-than-ideal gain.

If an investor's short option is assigned, the investor will be required to perform in accordance with their obligation to purchase or deliver the underlying security, regardless of the overall risk of their position when taking into account other options that may be owned as part of the overall multi-leg strategy. If the investor owns an option that serves to limit the risk of the overall spread position, it is up to the investor to exercise that option or to take other action to limit risk. 

Below are a couple of examples that underscore how important it is for every investor to understand the risks associated with potential assignment during market hours and potentially adverse price movements in afterhours trading.

Example #1: An investor is short March 50 XYZ puts and long March 55 XYZ puts. At the close of business on March expiration, XYZ is priced at $56 per share, and both puts are out of the money, which means they have no intrinsic value. However, due to an unexpected news announcement shortly after the closing bell, the price of XYZ drops to $40 in after-hours trading. This could result in an assignment of the short March 50 puts, requiring the investor to purchase shares of XYZ at $50 per share. The investor would have needed to exercise the long March 55 puts in order to realize the gain on the initial multi-leg position. If the investor did not exercise the March 55 puts, those puts may expire and the investor may be exposed to the loss on the XYZ purchase at $50, a $10 per share loss with XYZ now trading at $40 per share, without receiving the benefit of selling XYZ at $55.

Example #2: An investor is short March 50 XYZ puts and long April 50 XYZ puts. At the close of business on March expiration, XYZ is priced at $45 per share, and the investor is assigned XYZ stock at $50. The investor will now own shares of XYZ at $50, along with the April 50 XYZ puts, which may be exercised at the investor's discretion. If the investor chooses not to exercise the April 50 puts, they will be required to pay for the shares that were assigned to them on the short March 50 XYZ puts until the April 50 puts are exercised or shares are otherwise disposed of.

Note: In either example, the short put position may be assigned prior to expiration at the discretion of the option holder. Investors can check with their brokerage firm regarding their option exercise procedures and cut-off times.

For options-specific questions, you may contact OCC's Investor Education team at [email protected] , via chat on OptionsEducation.org or subscribe to the OIC newsletter . If you have questions about options trading in your brokerage account, we encourage you to contact your brokerage firm. If after doing so you have not resolved the issue or have additional concerns, you can contact FINRA .

Investor Alert: Relationship Investment Scams

Compare Funds With FINRA’s Fund Analyzer

Investing with Charitable Giving in Mind

The Importance of Scheduling an Annual 401(k) Checkup

The Importance of Investment Recordkeeping

Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

1. introduction to assignment risk in options trading, 2. understanding the buy to close strategy, 3. when is assignment likely, 4. the mechanics of buy to close and how it reduces risk, 5. strategic timing for buy to close transactions, 6. successful buy to close scenarios, 7. potential pitfalls and how to avoid them, 8. advanced techniques in assignment risk mitigation, 9. integrating buy to close into your trading plan.

assignment risk in options trading is a critical concept that every trader must understand to navigate the markets effectively. This risk arises when the holder of an option decides to exercise their right to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset. For the seller of the option, this means they are obligated to fulfill the contract's terms, which can lead to unexpected financial consequences if not managed properly. The risk of assignment is particularly acute near an option's expiration date or when a dividend is due, as these events can incentivize option holders to exercise their options.

From the perspective of a retail investor, assignment risk can be a source of anxiety, especially if they are selling options as a strategy to generate income. For institutional traders, assignment risk is a factor that must be incorporated into their comprehensive risk management strategies. Market makers view assignment risk as an operational consideration that can affect liquidity and pricing models.

To delve deeper into the intricacies of assignment risk, let's consider the following points:

1. Probability of Assignment : The likelihood of assignment increases as the option goes deeper into the money and as expiration approaches. Traders can use various models and indicators to estimate this probability and make informed decisions about their positions.

2. Impact of Dividends : Options on stocks that pay dividends pose a unique assignment risk. Call option holders may exercise their options just before the ex-dividend date to capture the dividend, potentially catching unaware call sellers off guard.

3. early Exercise and American options : Unlike European options, which can only be exercised at expiration, American options can be exercised at any time, increasing the assignment risk for sellers throughout the life of the option.

4. Strategies to Mitigate Risk : Traders can employ strategies such as 'rolling' their positions to a further expiration date or closing out their positions through a 'buy to close' order to manage assignment risk.

5. Tax Implications : Being assigned can have significant tax consequences, as it may trigger a taxable event. Traders need to be aware of the potential tax impact of assignment on their investment returns.

For example, imagine a trader who has sold a call option with a strike price of $50. If the stock's price surges to $60, the call option is deep in the money, and the probability of assignment increases significantly. If the trader does not wish to be assigned and potentially obligated to sell the stock at $50, they might choose to 'buy to close' the option, thereby neutralizing the position and eliminating the assignment risk.

Understanding assignment risk is essential for anyone involved in options trading. It requires a proactive approach to risk management and a thorough understanding of the options market dynamics . By considering the various perspectives and employing strategic measures, traders can navigate assignment risk and work towards achieving their investment objectives .

Introduction to Assignment Risk in Options Trading - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, the 'Buy to Close' strategy emerges as a pivotal maneuver for traders aiming to mitigate assignment risk. This technique is particularly relevant when an investor has previously sold an option and wishes to exit the position before the option reaches its expiration date. By employing 'Buy to Close', traders can purchase the same option contract, effectively nullifying their obligation to fulfill the terms of the contract should it be assigned. This action is akin to closing a loop, where the initial sale of the option is the opening act, and the subsequent purchase to close it completes the cycle.

From the perspective of a trader who has written a call option, the fear of the underlying stock's price surging beyond the strike price looms large. In such scenarios, 'Buy to Close' serves as a shield, protecting the trader from the potential financial strain of having to provide the shares at a price significantly lower than the market value. Conversely, for a trader who has written a put option, a plummeting stock price can trigger a similar defensive response, prompting the use of 'Buy to Close' to avoid purchasing the stock at an inflated strike price.

Here's an in-depth look at the 'Buy to Close' strategy:

1. Timing the Market : Astute traders monitor market conditions closely, seeking the optimal moment to execute a 'Buy to Close'. This decision is often influenced by factors such as volatility, time decay, and changes in the underlying asset's price.

2. Evaluating Premiums : The cost of buying back an option is determined by its premium, which fluctuates based on market dynamics. Traders must weigh the premium against potential losses from assignment to determine the financial viability of the 'Buy to Close' strategy.

3. Risk Management : By buying to close, traders can cap their losses, especially when the market moves against their initial position. This is crucial in preventing small losses from snowballing into significant financial setbacks.

4. Strategic Exit : Sometimes, 'Buy to Close' is used not out of necessity, but as a strategic choice to secure profits. For instance, if a trader has sold a put option and the stock price rises, buying to close at a lower premium locks in the profit margin.

5. Contract Specifications : It's essential to ensure that the option contract bought to close matches the one sold initially in terms of strike price, expiration date, and underlying asset.

To illustrate, consider a trader who has sold a call option for XYZ stock with a strike price of $50, receiving a premium of $2 per share. If XYZ's stock price climbs to $60, the trader faces the risk of assignment, which would entail selling shares at the agreed-upon strike price, resulting in a loss. To circumvent this, the trader can 'Buy to Close' the call option, perhaps at a premium of $3, thereby incurring a loss of $1 per share plus transaction costs. However, this loss is substantially less than the potential loss from assignment.

In summary, 'Buy to Close' is a nuanced strategy that requires a thorough understanding of market conditions , option pricing, and risk tolerance. It's a tool that, when wielded with precision, can significantly enhance a trader's ability to navigate the treacherous waters of options trading, ensuring that they remain afloat amidst the tumultuous waves of market uncertainty .

Understanding the Buy to Close Strategy - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, evaluating your position to assess the likelihood of assignment is a crucial aspect of risk management . Assignment occurs when the seller of an option is obligated to fulfill the terms of the contract – for the call option seller, this means delivering the underlying stock at the strike price, and for the put option seller , it means purchasing the underlying stock at the strike price. The risk of assignment increases as the option goes deeper in-the-money and approaches expiration. Understanding when assignment is likely can help traders make informed decisions on whether to hold, close, or adjust their positions.

Insights from Different Perspectives:

1. Seller's Perspective:

- In-the-Money Options: If you've sold an option that's now deep in-the-money, the chances of being assigned increase, especially as expiration nears. For example, if you've sold a call option and the stock price soars well above the strike price, the option holder has a financial incentive to exercise.

- Dividend Risk: Another scenario where early assignment can occur is prior to an ex-dividend date. If the dividend amount exceeds the remaining time value of an in-the-money call option, it's rational for the holder to exercise early and capture the dividend.

2. Buyer's Perspective:

- Exercising Options: As a buyer, exercising your option before expiration is typically less common because it forfeits any remaining time value. However, if an option is deep in-the-money and the time value is minimal, exercising might be considered to capture intrinsic value or dividends.

3. Market Conditions:

- Volatility: High volatility can affect the likelihood of assignment. In a volatile market, the price swings can push options in or out of the money quickly, altering assignment risks.

- Interest Rates: Changes in interest rates can influence an option's value and the decision to exercise. Higher rates can increase the cost of carrying positions, potentially affecting early exercise decisions .

In-Depth Information:

1. Time Decay (Theta):

- As options approach expiration, time decay accelerates . This decay erodes the time value, making in-the-money options more likely to be exercised. For instance, an in-the-money call option with only a few days left until expiration has a high probability of being assigned.

2. open Interest and volume :

- High open interest and volume in an option can indicate a more active market, which might lead to a higher likelihood of assignment. Traders should monitor these metrics as part of their evaluation.

3. Strategic Moves:

- Rolling Out: To avoid assignment, traders can 'roll out' their position to a further expiration date. For example, if you've sold a covered call that's in-the-money and wish to avoid assignment, you could buy back the option and sell another with a later expiration.

- Buy to Close: If the risk of assignment is high and undesirable, buying to close the position can eliminate the obligation. This is a direct way to manage assignment risk.

Examples to Highlight Ideas:

- Covered Call Scenario: Imagine you've written a covered call with a strike price of $50, and the stock jumps to $60 two days before expiration. The likelihood of assignment is high, and you must decide whether to close the position or potentially have the stock called away.

- Protective Put Scenario: If you've purchased a protective put option with a strike price of $40, and the stock plummets to $30, you might exercise the option to sell the stock at the higher strike price, especially if the contract is nearing expiration.

Evaluating the likelihood of assignment involves a multifaceted approach, considering factors like moneyness, market conditions, and strategic alternatives. By staying vigilant and proactive, traders can navigate the complexities of assignment risk and enhance their risk management strategies.

When is Assignment Likely - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, the 'Buy to Close' transaction stands as a pivotal strategy for traders looking to mitigate risk. This technique involves the purchase of an option contract with the same terms as the one that was initially sold, effectively neutralizing the open position. The utility of 'Buy to Close' lies in its capacity to limit potential losses, particularly in scenarios where the market moves against the trader's original position. By closing out the position, the trader can prevent further losses or secure profits before the option's expiration date.

From the perspective of a conservative trader, 'Buy to Close' is a prudent risk management tool . It allows for the realization of losses at a controlled level, rather than risking the uncertainty of market movements until the option's expiration. On the other hand, an aggressive trader might view 'Buy to Close' as an opportunity to capitalize on market volatility. By actively managing positions and closing them when favorable, they can lock in profits and redeploy capital to other potentially lucrative opportunities.

Here's an in-depth look at the mechanics of 'Buy to Close' and its role in reducing risk:

1. Counteracting Assignment Risk : When a trader sells an option, there's always a risk of assignment, which means the trader must fulfill the obligation of the contract if the option is exercised by the buyer. 'Buy to Close' eliminates this risk by closing the position before it can be assigned.

2. managing Margin requirements : Selling options often requires a significant amount of margin. If the trade moves unfavorably, the margin requirement can increase, tying up capital. 'Buy to Close' frees up this margin, allowing for better capital utilization.

3. Flexibility in Trading Strategy : 'Buy to Close' transactions provide traders with the flexibility to adjust their strategies in response to market changes. This adaptability is crucial for responding to unexpected market events or shifts in market sentiment.

4. Profit and Loss Realization : By using 'Buy to Close', traders can realize profits or losses before the expiration of the option. This is particularly useful in volatile markets where holding an open position could lead to significant losses.

5. Time Decay Utilization : Options are time-sensitive instruments that lose value as they approach expiration (theta decay). Traders can use 'Buy to Close' to take advantage of this decay by closing out positions when the remaining time value is low, thus minimizing the cost of closing the position.

For example, consider a trader who has sold a call option with a strike price of $50. If the underlying stock's price rises to $55, the trader faces the risk of assignment and potentially large losses. By executing a 'Buy to Close' order, the trader can purchase a call option with the same strike price and expiration date, thereby closing the position and limiting the loss to the difference between the sale price of the original option and the purchase price of the 'Buy to Close' option.

'Buy to Close' is a nuanced strategy that serves as a cornerstone of risk management in options trading . It offers traders a way to control their exposure to market movements and assignment risk, while providing the flexibility to adapt to changing market conditions . Whether used by conservative or aggressive traders, 'Buy to Close' is an essential tactic for safeguarding against the unpredictable nature of the options market.

The Mechanics of Buy to Close and How It Reduces Risk - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, 'Buy to Close' transactions are a critical maneuver for traders looking to manage assignment risk effectively. This strategy involves purchasing the same option contract that one has previously sold, effectively nullifying the position and eliminating the obligation to fulfill the contract's terms. The timing of such transactions is not merely a matter of chance or convenience; rather, it is a strategic decision that can significantly impact the profitability and risk profile of an options trade.

1. Market Volatility: Traders often monitor market volatility closely when considering a 'Buy to Close' transaction. During periods of high volatility, option premiums tend to increase, which could make it more expensive to close a position. Conversely, in a stable market, premiums might be lower, presenting a more favorable opportunity to execute a 'Buy to Close'.

2. Time Decay (Theta): Options are time-sensitive instruments, and their value erodes as the expiration date approaches . This time decay accelerates as the expiration date nears, making it advantageous for traders to 'Buy to Close' before time decay significantly diminishes the option's extrinsic value.

3. Dividend Dates: For options on dividend-paying stocks , the ex-dividend date is a crucial consideration. Option holders may execute a 'Buy to Close' transaction prior to this date to avoid assignment risk, as option writers are often assigned just before the ex-dividend date to fulfill the obligation of delivering shares.

4. Technical Indicators: Traders may use technical analysis to determine strategic timing for 'Buy to Close' transactions. For instance, if a stock hits a key support or resistance level, it might signal an opportune moment to close out a position.

5. Earnings Announcements: Earnings reports can cause significant price movements. Traders might choose to 'Buy to Close' before an earnings announcement to avoid the uncertainty and potential adverse movements that can follow these events.

Example: Consider a trader who has sold a call option with a strike price of $50. As the underlying stock approaches this strike price, the risk of assignment increases. If the stock's earnings report is due soon, and the market expects positive news, the trader might decide to 'Buy to Close' the position to avoid the risk of having to deliver the stock if it surges past the strike price post-announcement.

'Buy to Close' transactions are not a one-size-fits-all solution. They require careful consideration of market conditions, time decay, corporate events, and technical factors. By strategically timing these transactions, traders can manage assignment risk and enhance their overall trading strategy .

Let us write your business plan

FasterCapital's team works with you on preparing and writing a comprehensive and well-presented business plan document

In the realm of options trading, 'Buy to Close' transactions are a strategic maneuver used by investors to mitigate risk and secure profits. This technique involves purchasing an option contract to close out an existing short position. By doing so, traders can limit their exposure to assignment risk, which is the obligation to fulfill the terms of the option contract when an option buyer exercises their right.

case studies of successful 'Buy to Close' scenarios reveal a variety of circumstances where this strategy has been effectively employed. From seasoned traders to novices in the options market, these examples serve as a testament to the versatility and protective nature of the 'Buy to Close' approach.

1. hedging Against Market volatility : An investor who had sold call options against a stock they owned found themselves facing potential assignment as the stock's price surged unexpectedly. To avoid being compelled to sell their shares at the strike price, which was now well below the market price, they executed a 'Buy to Close' transaction. This allowed them to retain their shares and benefit from the continued upward trend in the stock's price.

2. capitalizing on Time decay : Another trader had written put options, betting on the stock's stability. As the expiration date approached and the stock remained stable, the value of the puts decreased due to time decay. Sensing an opportunity, the trader performed a 'Buy to Close' to repurchase the puts at a lower price, thus locking in the profit from the premium initially received.

3. Responding to Earnings Reports : Prior to an earnings announcement, a speculative trader sold naked calls on a company expected to underperform. Contrary to expectations, the company reported stellar results, causing the stock to jump and putting the trader at risk of assignment. By quickly utilizing a 'Buy to Close' strategy, the trader managed to exit the position with a manageable loss, avoiding the potentially catastrophic consequences of assignment.

4. Avoiding Dividend Risks : In a different scenario, an investor who had sold covered calls on a dividend-paying stock realized that the ex-dividend date was approaching. To prevent assignment and loss of the dividend, they chose to 'Buy to Close' the calls. This action ensured they retained ownership of the stock and received the dividend payout.

These case studies underscore the importance of 'Buy to Close' as a risk management tool in options trading. By understanding the various situations where this strategy can be applied, traders can navigate the options market with greater confidence and control over their investment outcomes. The key takeaway is that 'Buy to Close' is not just a reactive measure but can also be a proactive step in a well-thought-out trading strategy. It allows traders to adapt to market changes, protect gains, and minimize losses, demonstrating its value as an integral part of options trading.

Successful Buy to Close Scenarios - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, the strategy of 'buy to close' is a crucial maneuver to mitigate assignment risk. However, even the most astute traders can encounter pitfalls that jeopardize their positions. Understanding these potential pitfalls and the strategies to avoid them is paramount for maintaining a robust risk management framework .

One common pitfall is timing . The decision to 'buy to close' must be carefully timed. Acting too early or too late can lead to unnecessary losses or missed opportunities for profit. For instance, consider an options trader who anticipates a stock's decline and sells a call option. If the stock unexpectedly rallies, the trader may rush to 'buy to close' to avoid assignment. However, if the rally is short-lived, the trader could have avoided the loss by waiting for the stock to retreat.

Another pitfall is overlooking implied volatility . Implied volatility reflects the market's forecast of a stock's potential movement and significantly affects options prices. A trader who ignores implied volatility may 'buy to close' at an inflated price, especially during periods of market unrest or before earnings announcements.

To navigate these challenges, here are some strategies:

1. Implement stop-Loss orders : Establishing stop-loss orders can automate the 'buy to close' process at predetermined price levels, helping traders manage risk without constant market monitoring.

2. Monitor Implied Volatility : Keep a close eye on implied volatility indicators. If volatility is high, it may be prudent to delay the 'buy to close' transaction until the volatility subsides, potentially reducing the cost.

3. Utilize Technical Analysis : Employ technical analysis to identify key support and resistance levels . These can serve as indicators for optimal 'buy to close' points.

4. Stay Informed on Corporate Events : Be aware of upcoming earnings reports or corporate announcements that could affect stock prices and, consequently, the options market.

5. Diversify Strategies : Don't rely solely on 'buy to close' to manage assignment risk. Incorporate a mix of strategies like spreads or straddles to diversify and mitigate risk.

6. Continuous Education : The options market is complex and ever-evolving. Continuous education on market trends and options strategies is essential.

For example, a trader might use a stop-loss order to 'buy to close' a put option if the stock falls below a certain price. This approach can prevent a small loss from becoming a substantial one if the stock continues to decline. Conversely, a trader might delay a 'buy to close' if they believe the stock's rise is temporary, allowing them to close the position at a better price later.

While 'buy to close' is a valuable strategy for avoiding assignment risk , it is not without its challenges. By understanding and anticipating potential pitfalls, traders can employ strategies to navigate these risks effectively, ensuring a more secure and profitable trading experience.

Potential Pitfalls and How to Avoid Them - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, assignment risk is a critical factor that traders must navigate with care. This risk arises when the holder of an option decides to exercise their right, requiring the option writer to fulfill the obligations of the contract. To mitigate this risk, advanced techniques must be employed, focusing on proactive strategies and keen market insight. These methods go beyond the basic 'buy to close' tactic, delving into a more nuanced understanding of market dynamics and trader psychology.

From the perspective of a seasoned trader, the key to mitigating assignment risk lies in monitoring open interest and volume . High open interest in an option may indicate a higher likelihood of assignment, especially as expiration approaches. Conversely, a trader with a contrarian view might interpret high open interest as a sign of potential market saturation and, therefore, a lower risk of assignment.

Here are some advanced techniques that can be employed:

1. Delta Hedging : This involves creating a hedge for an options position by purchasing or selling the underlying asset. For example, if a trader has sold calls, they might purchase the underlying stock to offset potential losses if the calls are assigned.

2. Rolling Out : Before an option reaches expiration, a trader can 'roll' the position to a further expiration date. This can be done by simultaneously closing the current position and opening a new one at a later date. For instance, if a trader has sold a call that is approaching in-the-money status, they might roll it to a higher strike price and a later expiration.

3. Strategic Use of Spreads : By using options spreads, such as vertical or calendar spreads, traders can limit their risk of assignment. A vertical spread involves buying and selling options of the same type but different strike prices , while a calendar spread involves options of the same strike but different expiration dates.

4. Early Closure : Sometimes, the best strategy is to close a position well before expiration, especially if the trade has already yielded substantial profit or if the market conditions have changed unfavorably.

5. Diversification of Strategies : Employing a variety of strategies, such as covered calls, protective puts, and straddles, can distribute risk and reduce the impact of any single assignment.

For example, consider a trader who has written a series of put options. As the market begins to fall, the likelihood of those options being exercised increases. To mitigate this risk, the trader could employ delta hedging by purchasing a proportionate amount of the underlying asset. This would offset the potential obligation to buy the asset at the strike price if the puts are assigned.

While 'buy to close' remains a fundamental technique in managing assignment risk , the advanced techniques outlined above provide traders with a robust toolkit for navigating the complexities of options trading . By employing these strategies, traders can better position themselves to manage risk and capitalize on market opportunities .

Advanced Techniques in Assignment Risk Mitigation - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

In the realm of options trading, 'Buy to Close' is a pivotal strategy that traders employ to mitigate assignment risk. This technique involves purchasing an option contract to offset a previously opened position, effectively closing out the trade and eliminating the obligation to fulfill the contract's terms. By integrating 'Buy to Close' into your trading plan, you can exert greater control over your portfolio's risk exposure , particularly when facing the prospect of assignment.

From the perspective of a conservative trader, 'Buy to Close' serves as a safeguard, a way to lock in profits or limit losses before an option reaches expiration. For instance, if you've sold a call option and the underlying stock's price is climbing perilously close to the strike price, executing a 'Buy to Close' transaction can prevent the option from being exercised and the stock being called away.

Conversely, from an aggressive trader's viewpoint, 'Buy to Close' can be a tactical move to capitalize on market volatility. If the market swings in your favor and the value of the written option plummets, buying it back at a lower premium can yield a tidy profit.

Here are some in-depth insights into incorporating 'Buy to Close' into your trading strategy:

1. Timing is Crucial : The decision to 'Buy to Close' should be timed based on market analysis and the specific goals of your trading plan. For example, if a significant earnings announcement is expected, and you anticipate increased volatility, it may be prudent to close out positions beforehand.

2. Assessing Premium Decay : Options lose value as they approach expiration – a phenomenon known as time decay. By monitoring this, you can determine the optimal moment to 'Buy to Close', potentially when the premium has eroded significantly, reducing the cost of the buyback.

3. Risk Management : 'Buy to Close' is an essential tool for managing risk. It allows you to exit trades that are moving against you before losses escalate. For example, if you've sold a put option and the stock's price is dropping, buying back the option can prevent you from having to buy the stock at a high strike price.

4. Strategic Exits : Use 'Buy to Close' to strategically exit positions that no longer align with your market outlook. If your initial analysis changes due to new information, this maneuver can help realign your portfolio with your revised expectations.

5. Leveraging Market Movements : In volatile markets, 'Buy to Close' can be used to take advantage of price swings. For example, if you sold a straddle and the market moves sharply in one direction, buying back the losing side can minimize losses and leave the profitable side open.

To illustrate, consider a trader who has sold a covered call option . If the stock's price surges unexpectedly, the trader might face the risk of assignment. By executing a 'Buy to Close' order, the trader can avoid delivering the stock while still retaining ownership. This move not only prevents potential loss of stock but also preserves the opportunity for future gains.

'Buy to Close' is a versatile and strategic component of options trading that can serve multiple purposes within a trader's arsenal. Whether employed as a defensive mechanism to prevent assignment or as an offensive tactic to exploit market conditions, it is an indispensable element of sound risk management and strategic planning . By understanding and utilizing 'Buy to Close' effectively, traders can enhance their ability to navigate the complexities of the options market with confidence.

Integrating Buy to Close into Your Trading Plan - Assignment Risk: Avoiding Assignment: Risk Management with Buy to Close

Read Other Blogs

The impact of first impressions cannot be overstated, especially in the realm of brand perception....

In the realm of social media, metrics serve as the compass that guides marketers, content creators,...

Environmental consulting is a dynamic field that merges scientific knowledge with strategic...

In the rapidly evolving landscape of financial technology, startups are at the forefront of...

In the realm of healthcare and business, there exists a unique intersection where the compassionate...

Drama workshop facilitators are professionals who design and deliver creative and engaging...

The concept of the Efficient Frontier is a cornerstone of modern investment theory and holds...

Embarking on a journey towards enhanced personal effectiveness begins with a commitment to both...

Business loans are a vital source of funding for many entrepreneurs and small businesses. They can...

Options Assignment: Navigating the Rights and Obligations

By Tyler Corvin

Ever been blindsided by an unexpected traffic ticket in the mail? 

You knew driving came with its set of potential consequences, yet you took to the road regardless. Suddenly, you’re left with a tangible obligation to pay. This unforeseen shift, where what was once a mere possibility becomes an immediate reality, captures the spirit of options assignment within the vast realm of options trading.

Diving into the details, option assignment serves as the bridge between the abstract realm of rights and the concrete world of duties in this field. It’s that unassuming piece in the machinery that can, without warning, change the entire game – often carrying notable financial repercussions. In a domain where every move has implications, truly grasping option assignment is foundational, ensuring not just survival but genuine success.

Join us in this comprehensive exploration of option assignment, arming traders of all experience levels with the knowledge to sail these intricate seas with assuredness and accuracy.

What you’ll learn

What is Options Assignment?

How options assignment works, identifying option assignment , examples of option assignment, managing and mitigating assignment risks, what option assignment means for individual traders.

• Conclusion 

Dive into the realm of options trading and you’ll find a tapestry of processes and potential. “Options assignment” is one pivotal cog in this intricate machine. To a newcomer, this term might seem a tad daunting. But a step-by-step walk-through can demystify its core.

In its simplest form, options assignment means carrying out the rights specified in an option contract. Holding an option allows a trader the choice to buy or sell a particular asset, but there’s no compulsion. The moment they opt to use this right, that’s when options assignment kicks in.

Think of it this way: You’ve got a ticket (option) to a show (buy or sell an asset). You decide if and when to attend. When you make the move, that transition is the options assignment.

There are two main types of option assignments:

• Call Option Assignment : Triggered when a call option holder exercises their right. The seller of the option then steps into the spotlight, bound to sell the asset at the agreed-upon price.
• Put Option Assignment : Conversely, if a put option holder steps forward, the seller of the put takes the stage. Their role? To buy the asset at the specified rate.

To truly grasp options assignment, one must understand the dance between rights and obligations in options trading.

When a trader buys an option, they’re essentially reserving a right, a possible move. On the other hand, selling an option translates to accepting a duty if the option’s holder chooses to play their card.

Rights with Call Options: Buying a call option grants you a special privilege. You can procure the underlying asset at a set price before the option expires. If you choose to exercise this right, the one who sold you the call gets assigned. Their task? Handing over the asset at that set price.

Obligations with Put Options: Securing a put option empowers you to sell the underlying at a pre-decided rate. Should you exercise this, the put’s seller steps up, committed to buying the asset at the given rate.

Several factors steer the course of options assignment, including intrinsic value, looming expiration dates, and current market vibes. To stay ahead of these influences, many traders utilize option trade alerts for timely insights. And remember, while many options might find buyers, not all see execution. Hence, not every seller will get assigned. For traders, understanding this rhythm is vital, shaping many strategies in options trading. 

In the multifaceted world of options trading, discerning option assignment straddles the line between art and science. While no technique guarantees surefire results, several pointers and signals can wave a flag, hinting at an impending assignment.

In-the-Money Options : A robust sign of a looming assignment is the option’s stance relative to its strike price. “In-the-money” refers to an option’s moneyness , and plays a pivotal role in the behavior of option holders. Deeply in-the-money (ITM) options amplify the odds of assignment. An ITM call option, where the market price of the asset towers above the strike price, encourages the holder to exercise and swiftly offload the asset on the market. Conversely, an ITM put option, where the market price trails significantly behind the strike price, incentivizes the holder to scoop up the asset in the market and then exercise the option to vend it at the loftier strike price.

Expiration’s Shadow: The ticking clock of an expiring option raises the assignment stakes, especially if it remains ITM. Many traders make their move just before the eleventh hour to capitalize on their gains.

Dividend Dates in Focus: Call options inching toward expiry ahead of a dividend date, especially if they’re ITM, stand at an elevated assignment crosshair. Option aficionados might play their call options to pocket the dividend, which they’d bag if they possess the core shares.

Extrinsic Value’s Decline : A diminishing time or extrinsic value of an option elevates its exercise odds. When intrinsic value dominates an option’s worth, a holder might be inclined to cash in on this value.

Volume & Open Interest Dynamics : A sudden surge in trading or a dip in open interest can be telltale signs. Understanding volume’s role is crucial as such fluctuations might hint at traders either hopping in or out, suggesting possible exercises and assignments. 

Navigating the Post-Assignment Terrain

Grasping the ripple effects of option assignment is vital, highlighting the immediate responsibilities and potential paths for both the buyer and seller.

For the Option Seller:

• Call Option Assignment : For a trader who’s sold a call option, assignment means they’re on the hook to hand over the underlying shares at the strike price. If they’re short on shares, a market purchase is in order—potentially at a loss if market prices overshoot the strike.
• Put Option Assignment: Assignment on a peddled put option necessitates the trader to buy the shares at the strike price . If this price overshadows the market rate, losses loom.

For the Option Buyer:

• Call Option Play : Exercising a call lets the buyer snap up shares at the strike price. They can either nestle with them or trade them off.
• Put Option Play: Exercising a put gives the buyer the reins to sell their shares at the strike price. This play often pays off when the market rate is dwarfed by the strike, ensuring a tidy profit on the dispensed shares.

Post-assignment, all involved must be on their toes, knowing what triggers margin calls , especially if caught off-guard by the assignment. Tax implications may also hover, influenced by the trade’s nature and the tenure of the position.

Being savvy about these subtleties and gearing up for possible turns of events can drastically refine one’s journey through the options trading maze. 

Call Option Assignment Scenario

Imagine an investor purchases an Nvidia ( NVDA ) call option at a strike price of $435, hoping that the price of the stock will ascend after finding out that they may be forced to move out of some countries . The option is set to expire in a month. Soon after, not only did NVDA rebound from the news, but they reported very strong quarterly earnings, propelling the stock to $455.

Spotting the favorable trend, the investor opts to wield their right to purchase the stock at the agreed strike price of $435, despite its $455 market value. This initiates the option assignment.

The other investor, having sold the option, must now part with their NVDA shares at $435 apiece. If they’re short on stocks, they’d have to fetch them at the going rate of $455 and let them go at a deficit. The first investor, however, stands at a crossroads: retain the shares in hopes of further gains or swiftly trade them at $455, reaping a neat sum. 

Put Option Assignment Scenario

Let’s visualize an investor who speculates a dip in the share price of V.F. Corporation ( VFC ) after seeing news about an activist investor causing shares to jump almost 14% in a day . To hedge their bets, they secures a put option from another investor at a strike price of $18.50, set to lapse in a month.

Fast forward a week, let’s say VFC divulges lackluster quarterly figures, causing the stock to dive to $10. The first investor, seizing the moment, employs their put option, electing to sell their shares at the $18.50 strike price.

When the assignment bell tolls, the other investor finds himself bound to buy the shares from the first investor at the agreed $18.50, a rate that overshadows the current $10 market value. The first investor thus sidesteps the market slump, securing a favorable sale. The other investor, however, absorbs a loss, acquiring stocks at a premium to their market worth.

The realm of options trading is akin to navigating a dynamic river, demanding a sharp comprehension of the risks that lie beneath its surface. A predominant risk that traders often encounter is assignment risk. When one assumes the role of an option seller, they inherit the duty to honor the contract if the buyer opts to exercise. Grasping the gravity of this can make the difference, underscoring the necessity of adept risk management.

A savvy approach to temper assignment risk is by keeping a vigilant eye on the extrinsic value of options. Generally, options rich in extrinsic value tend to resist early assignment. This resistance emerges as the extrinsic value dwindles when the option dives deeper in-the-money, thereby tempting the holder to exercise.

Furthermore, economic currents, ranging from niche corporate updates to sweeping market tides, can be triggers for option assignments. Staying attuned to these economic ripples equips traders with the vision needed to either tweak or maintain their positions. For example, traders may opt to sidestep selling options that are deeply in-the-money, given their higher susceptibility to assignments due to their shrinking extrinsic value.

Incorporating spread tactics, like vertical spreads  or iron condors, furnishes an added shield. These strategies can dampen the risk of assignment since one part of the spread frequently balances the risk of its counterpart. Should the specter of a short option assignment hover, traders might contemplate ‘rolling out’ their stance. This move entails repurchasing the short option and subsequently selling another, possibly at a varied strike rate or a more distant expiry.

Yet, despite these protective layers, it remains pivotal for traders to brace for possible assignments. Maintaining ample liquidity, be it in capital or necessary shares, can avert unfavorable scenarios like hasty liquidations or stiff margin charges. Engaging regularly with brokers can also shed light, occasionally offering a heads-up on looming assignments.

In conclusion, the bedrock of risk management in options trading is rooted in perpetual learning. As traders hone their craft, their adeptness at forecasting and navigating assignment risks sharpens.

In the intricate world of options trading, option assignments aren’t just nuanced details; they’re pivotal moments with deep-seated implications for individual traders and the health of their portfolios. Beyond the immediate financial aftermath, assignments can reshape trading plans, risk dynamics, and the overarching path of an investor’s journey.

At its core, option assignments can transform a trader’s asset landscape. Consider a trader who’s short on a call option. If they’re assigned, they might be compelled to supply the underlying stock. This can result in a rapid stock outflow from their portfolio or, if they don’t possess the stock, birth a short stock stance. On the flip side, a trader short on a put option who faces assignment may find themselves buying the stock at the strike price, thereby dipping into their cash reserves.

These immediate shifts can generate broader portfolio ripples. An unexpected gain or shedding of stocks can jostle a trader’s asset distribution, veering it off their envisioned path. If, for instance, a trader had charted a particular stock-to-cash distribution or a meticulous diversification blueprint, an option assignment might throw a spanner in the works.

Additionally, assignments can serve as a real-world litmus test for a trader’s risk-handling prowess . A surprise assignment might spark margin calls for those not sufficiently fortified with capital. It stands as a poignant nudge about the essence of ensuring liquidity and safeguarding against the unpredictable whims of the market.

Strategically speaking, recurrent assignments might signal it’s time for traders to recalibrate. Are the options they’re offloading too submerged in-the-money? Have they factored in pivotal market shifts that might heighten early exercise odds? Such reflective moments can pave the way for refining and elevating trading methods. 

In the multifaceted world of options trading, option assignment stands out as both a potential boon and a challenge. Far from being a simple checkbox in the process, its ramifications can mold the contours of a trader’s portfolio and steer long-term tactics. The importance of comprehending and adeptly managing option assignment resonates, whether you’re dipping your toes into options for the first time or weaving through intricate trades with seasoned expertise. 

Furthermore, mastering options trading is about integrating its myriad concepts into a cohesive playbook. Whether it’s differentiating trading strategies like the iron condor from the iron butterfly strategy or delving deep into the nuances of option assignments, each component enriches the narrative of a trader’s odyssey. As markets shift and new hurdles arise, a solid grasp of foundational principles remains an invaluable asset. In this perpetual dance of learning and evolution, may your trading maneuvers always be well-informed, proactive, and adept. 

Understanding Options Assignment: FAQs

What factors influence the likelihood of an option being assigned.

Several factors come into play, including the option’s intrinsic value , the time remaining until expiration, and upcoming dividend announcements. Options that are deep in the money or nearing their expiration date are more likely to be assigned.

Are Some Option Styles More Prone to Assignment than Others?

Absolutely. When considering different option styles , it’s essential to note that American-style options can be exercised at any point before their expiration, which means they face a higher risk of early assignment. In contrast, European-style options can only be exercised at expiration.

How Do Current Market Trends Impact Assignment Risk?

Factors like market volatility, notable price shifts, and external economic happenings can amplify the chances of an option being assigned. For example, an option might be assigned before a company’s ex-dividend date if the expected dividend outweighs the weakening of theta decay .

Can Traders Reverse or Counter the Effects of an Option Assignment?

Once an option has been assigned, it’s set in stone. However, traders can maneuver within the market to balance out the implications of the assignment, such as procuring or selling the underlying asset.

Are There Any Fees Tied to Option Assignments?

Indeed, brokers usually impose a fee for both assignments and exercises. The specific fee can differ depending on the broker, making it essential for traders to understand their brokerage’s charging scheme.

An Overview on Esoteric Debt

What is an Effective Annual Interest Rate?

How to Calculate Depreciation Recapture

What is Direct Investment?

Unlocking the Degree of Financial Leverage

Trade Options With Me

For Your Financial Freedom

What is Options Assignment & How to Avoid It

If you are learning about options, assignment might seem like a scary topic. In this article, you will learn why it really isn’t. I will break down the entire options assignment process step by step and show you when you might be assigned, how to minimize the risk of being assigned, and what to do if you are assigned.

Video Breakdown of Options Assignment

Check out the following video in which I explain everything you need to know about assignment:

What is Assignment?

To understand assignment, we must first remember what options allow you to do. So let’s start with a brief recap:

• A call option gives its buyer the right to buy 100 shares of the underlying at the strike price
• A put option gives its buyer the right to sell 100 shares of the underlying at the strike price

In other words, call options allow you to call away shares of the underlying from someone else, whereas a put option allows you to put shares in someone else’s account. Hence the name call and put option.

The assignment process is the selection of the other party of this transaction. So the person that has to buy from or sell to the option buyer that exercised their option.

Note that an option buyer has the right to exercise their option. It is not an obligation and therefore, a buyer of an option can never be assigned. Only option sellers can ever be get assigned since they agree to fulfill this obligation when they sell an option.

Let’s go through a specific example to clarify this:

• The underlying security is stock ABC and it is trading at $100.
• Peter decides to buy 1 put option with a strike price of 95 as a hedge for his long stock position in ABC
• Kate sells this exact same option at the same time.

Over the next few weeks, ABC’s price goes down to $90 and Peter decides to exercise his put option. This means that he uses his right to sell 100 shares of ABC for $95 per share. Now Kate is assigned these 100 shares of ABC which means she is obligated to buy them for $95 per share. 

Peter now has 100 fewer shares of ABC in his portfolio, whereas Kate has 100 more.

This process is analog for a call option with the only difference being that Kate would be short 100 shares and Peter would have 100 additional shares of ABC in his portfolio.

Hopefully, this example clarifies what assignment is.

Who Can Be Assigned?

To answer this question, we must first ask ourselves who exercises their option? To do this, let’s quickly look at the different ways that you can close a long option position:

• Sell the option: Selling an option is probably the easiest way to close a long option position. Doing this will have no effect on the option seller.
• Let the option expire: If the option is Out of The Money , it would expire worthless and there would be no consequence for the option seller. If, on the other hand, the option is In The Money by more than $0.01, it would typically be automatically exercised . This would start the options assignment process.
• Exercise the option early: The last possibility would be to exercise the option before its expiration date. This, however, can only be done if the option is an American-style option. This would, once again, lead to an option assignment.

So as an option seller, you only have to worry about the last two possibilities in which the buyer’s option is exercised. 

But before you worry too much, here is a quick fact about the distribution of these 3 alternatives:

Less than 10% of all options are exercised.

This means 90% of all options are either sold prior to the expiration date or expire worthless. So always remember this statistic before breaking your head over the risk of being assigned.

It is very easy to avoid the first case of being assigned. To avoid it, just close your short option positions before they expire (ITM). For the second case, however, things aren’t as straight forward.

Who Risks being Assigned Early?

Firstly, you have to be trading American-style options. European-style options can only be exercised on their expiration date. But most equity options are American-style anyway. So unless you are trading index options or other kinds of European-style options, this will be the case for you.

Secondly, you need to be an options seller. Option buyers can’t be assigned.

These two are necessary conditions for you to be assigned. Everyone who fulfills both of these conditions risks getting assigned early. The size of this risk, however, varies depending on your position. Here are a few things that can dramatically increase your assignment risk:

• ITM: If your option is ITM, the chance of being assigned is much higher than if it isn’t. From the standpoint of an option buyer, it does not make sense to exercise an option that isn’t ITM because this would lead to a loss. Nevertheless, it is possible. The deeper ITM the option is, the higher the assignment risk becomes.
• Dividends : Besides that, selling options on securities with upcoming dividends also increases your risk of assignment. More specifically, if the extrinsic value of an ITM call option is less than the amount of the dividend, option buyers can achieve a profit by exercising their option before the ex-dividend date. 
• Extrinsic Value: Otherwise, keep an eye on the extrinsic value of your option. If the option has extrinsic value left, it doesn’t make sense for the option buyer to exercise their option because they would achieve a higher profit if they just sold the option and then bought or sold shares of the underlying asset. Typically, the less time an option has left, the lower its extrinsic value becomes. Implied volatility is another factor that influences extrinsic value.
• Puts vs Calls: This is more of an interesting side note than actual advice, but put options tend to get exercised more often than call options. This makes sense since put options give their buyer the right to sell the underlying asset and can, therefore, be a very useful hedge for long stock positions.

How can you Minimize Assignment Risk?

Since you now know what assignment is, and who risks being assigned, let’s shift our focus on how to minimize the assignment risk. Even though it isn’t possible to completely remove the risk of being assigned, there are things that you can do to dramatically decrease the chances of being assigned.

The first thing would be to avoid selling options on securities with upcoming dividend payments. Before putting on a position, simply check if the underlying security has any upcoming dividend payments. If so, look for a different trade.

If you ever are in the position that you are short an option and the ex-dividend of the underlying security is right around the corner, compare the size of the dividend to the extrinsic value of your option. If the extrinsic value is less than the dividend amount, you really should consider closing the position. Otherwise, the chances of being assigned are high. This is especially bad since being short during a dividend payment of a security will force you to pay the dividend.

Besides avoiding dividends, you should also close your option positions early. The less time an option has left, the lower its extrinsic value becomes and the more it makes sense for option buyers to exercise their options. Therefore, it is good practice to close your (ITM) short option positions at least one week before the expiration date.

The deeper an option is ITM, the higher the chances of assignment become. So the just-mentioned rule is even more important for deep ITM options.

If you don’t want to indefinitely close your position, it is also possible to roll it out to a later expiration cycle. This will give you more time and add extrinsic value to your position.

FAQs about Assignment

Last but not least, I want to answer some frequently asked questions about options exercise and assignment.

1. What happens if your account does not have enough buying power to cover the assigned position?

This is a common worry for beginning options traders. But don’t worry, if you don’t have enough capital to cover the new position, you will receive a margin call and usually, your broker will just automatically close the assigned shares immediately. This might lead to a minor assignment fee, but otherwise, it won’t significantly affect your account. Tatsyworks, for example, charges an assignment fee of only $5.

Check out my review of tastyworks

2. How does assignment affect your P&L?

When an option is exercised, the option holder gains the difference between the strike price and the price of the underlying asset. If the option is ITM, this is exactly the intrinsic value of the option. This means that the option holder loses the extrinsic value when he exercises his/her option. That’s also why it doesn’t make sense to exercise options with a lot of extrinsic value left.

This means that as soon as the option is exercised, it is only the intrinsic value that is relevant for the payoff. This is the same payoff as the option at its expiration date.

So as an options seller, your P&L isn’t negatively affected by an assignment. Either it stays the same or it becomes slightly better due to the extrinsic value being ignored.

As an example, if your option is ITM by $1, you will lose up to $100 per option or $1 per share that you are assigned. But this does not account for the extrinsic value that falls away with the exercise of the option. So this would be the same P&L as at expiration. Depending on how much premium you collected when selling the option, this might still be a profit or a minor loss.

With that being said, as soon as you are assigned, you will have some carrying risk. If you don’t or can’t close the position immediately, you will be exposed to the ongoing price fluctuations of that security.  Sometimes, you might not be able to close the new position immediately because of trading halts, or because the market is closed.

If you weren’t planning on holding that security, it is a good idea to close the new position as soon as possible. 

Option spreads such as vertical spreads, add protection to these price fluctuations since you can just exercise the long option to close the assigned share position at the strike price of the long option.

3. When an option holder exercises their option, how is the assignment partner chosen?

This is usually a random process. As soon as an option is exercised, the responsible brokerage firm sends a request to the Options Clearing Corporation (OCC). They send back the requested shares, whereafter they randomly choose another brokerage firm that currently has a client that is short the exercised option. Then the chosen broker has to decide which of their clients is assigned. This choice is, once again, random or a time-based priority system is used.

4. How does assignment work for index options?

As there aren’t any shares of indexes, you can’t directly be assigned any shares of the underlying asset. Therefore, index options are cash-settled. This means that instead of having to buy or sell shares of the underlying, you simply have to pay the difference between the strike price and the underlying trading price. This makes assignment easier and a lot less likely among index options.

Note that ETF options such as SPY options are not cash-settled. SPY is a normal security with openly traded shares, so exercise and assignment work just like they do among equity options.

I hope this article made you realize that assignment isn’t as bad as it might seem at first. It is just important to understand how the options assignment process works and what affects the likelihood of being assigned.

To recap, here’s what you should to do when you are assigned:

if you have enough capital in your account to cover the position, you could either treat the new position as a normal (stock) position and hold on to it or you could close it immediately. If you don’t have a clear trading plan for the new position, I recommend the latter.

If, on the other hand, you don’t have enough buying power, you will receive a margin call from your broker and the position should be closed automatically.

Assignment does not have any significant impact on your P&L, but it comes with some carrying risk. Options spreads can offer more protection against this than naked option positions.

To mitigate assignment risk, you should close option positions early, always keep an eye on the extrinsic value of your option positions, and avoid upcoming dividend securities.

And always remember, less than 10% of options are exercised, so assignment really doesn’t happen that often, especially not if you are actively trying to avoid it.

For the specifics of how assignment is handled, it is a good idea to contact your broker, as the procedures can vary from broker to broker.

Thank you for taking the time and reading this post. If you have any questions, comments, or feedback, please let me know in the comment section below.

22 Replies to “What is Options Assignment & How to Avoid It”

hi there well seems like finally there is one good honest place. seem like you are puting on the table the whole truth about bad positions. however my wuestion is when can one know where to put that line of limit. when do you recognise or understand that you are in a bad position? thanks and once again, a great site.

Well If you are trading a risk defined strategy the point would be at max loss and not too much time left until expiration. For undefined risk strategies however it can be very different. I would just say if you don’t have too much time until expiration and are far from making money you should use some common sense and admit that you are wrong.

What would happen in the event of a crash. Would brokers be assigning, options, cashing out these shares, and making others bankrupt. Well, I guessed I sort of answered my own question. Its not easy to understand, especially not knowing when this would come up. But seems like you hit the important aspects of the agreement.

Actually I wouldn’t imagine that too many people would want to exercise their options in case of a market ctash, because they probably wouldn’t want to hold stocks in this risky and volatile environment. 

And to the part of the questions: making others bankrupt. This really depends on the situation. You can’t get assigned more stock than your option covers. This means as long as you trade with reasonable position sizing nothing too bad can happen. Otherwise I would recommend to trade with defined risk strategies so your maximum drawdown is capped.

Thanks for writing about assignment Louis. After reading the section how assignment works, I feel I am somewhat unclear about how assignment works when the exerciser exercises Put or Call option. In both cases, if the underlying is an index, is the settlement done through the margin account money? Would you be able to provide a little more detail of how exercising the option (Put vs Call) would work in case of an underlying stock vs Index.

Thank you very much in advance

Thanks for the question. Indexes can’t be traded in the same way as stocks can. That’s why index options are settled in cash. If your index option is assigned, you won’t have to buy or sell any shares of the underlying index at the strike price because there exist no shares of indexes. Instead, you have to pay the amount that your index option is ITM to the exerciser of your option. Let me give you an example: You are short a call option with the strike price of 1000. The underlying asset is an index and it’s price is 1050. This means your call option is 50 points ITM. If someone exercises your long call option, you will have to pay him/her the difference between the strike price and the underlying’s price which would be 50 (1050-1000). So the main difference between index and stock options is that you don’t have to buy/sell any shares of the underlying asset for index options. I hope this helps. Please let me know if you have any other questions or comments.

Can the same logic be applied for ETFs as it does Indexes? For example, if I trade the SPY ETF, would it be settled in cash?

Thanks! Johnson

Hi Johnson, Exercise and assignment for ETFs such as SPY work just like they do for equities. ETFs have shares that are openly traded, whereas indexes don’t. That’s why indexes are settled in cash, whereas ETFs aren’t. I hope this helps.

There are many articles online that I read that are biased against options tradings and I am a bit surprised to read a really helpful article like this. I find this helpful in understanding options trading, what are the techniques and how to manage the risks. Before, I was hesitant to try this financial game but now, after reading this article, I am considering participating with live accounts and no longer with a demo account. A few months ago, I signed up with a company called IQ Options, but really never involved real money and practiced only with a demo account.

Thanks for your comment. I am glad to see that you liked the post. However, I don’t recommend sing IQ Option to trade since they are a very shady trading firm. You could check out my  Review of IQ Option for all the details.

this is a great and amazing article. i sincerely your effort creating time  to write on such an informative article which has taught me a lot more on what is options assignment and avoiding it. i just started trading but had no ideas on this as a beginner. i find this article very helpful because it has given me more understanding on options trading and knowing the techniques and how to manage the risks. thanks for sharing this amazing article

You are very welcome

Hello, the first thing that i noticed when i opened this page is the beauty of the website. i am sure you have put much effort into creating this article and the details are really clear here. after watching the video break down, i fully understood the entire process on how to avoid options assignment.

Thank you so much for the positive feedback!

I would love to create a website like yours as the design used is really nice, simple and brings about clarity of the write ups, but then you wrote a brilliant article on how to avoid options assignment. great video here. it was  confusing at first. i will suggest another video be added to help some people like me.

Thanks for the feedback. I recommend checking out my  options trading beginner course . In it, I cover all the basics that weren’t explained here.

Thanks for your very helpful article. I am contemplating selling a call that would cover half my shares on company X. How can ensure that the assignment process selects the shares that I bought at a higher price, so as to maximize capital losses?

Hi Luis, When you are assigned, you just automatically buy/sell shares of the underlying at the strike price. This means your overall portfolio is adjusted by these 100 shares. The exact shares and your entry price are irrelevant. If you have 50 shares of X and your short call is assigned, you will sell 100 shares of X at the strike price. After this, your position would be -50 shares of X which would be equivalent to being short 50 shares of X. I hope this helps.

Louis, I entered a CALL butterfly spread at $100 below where I intended, just 2 days before expiration date. I intended to speculate on a big earning announcement jump the next day. It was a debit of 1.25. Also, when I realized my mistake, I tried to close it for anything at all. The Mark fluctuated between 40 and 70, but I could not get it to close. So now I am assigned to sell 200 share at 70 dollars below the market price of the stock. I am having a heart attack. I do not have the 200 shares to deliver, so it seems I have to buy them at the market, and sell them for $70 less, for a loss of $14,000.

What other options are open to me? Can my trading firm force a close with a friendly market maker and make it as if it happened on Friday? I am willing to pay a friendly market maker several hundred dollars to make this trade. Is that an option? Other options the trading firm can do for me that would cost me less than $14,000?

Hi Paul, Thanks for your comment. From the limited information provided, it is hard to say what is actually going on. If you bought a call butterfly spread, your max loss should be limited to the premium you paid to open the position. An assignment shouldn’t have a huge impact on your overall P&L. I highly recommend contacting your broker and explaining your situation to them since they have all the information required to evaluate what’s actually going on. But if the loss is real, there is no way for you to make a deal with a market maker to limit or undo potential losses. I hope this helps.

What happens with ITM long call option that typically gets automatically exercised at expiration, if the owner of the call option doesn’t have the cash/margin to cover the stock purchase?

He would receive a margin call

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Receive Emails with Educational Content

Privacy Overview

Want to Become a Better Trader Today?

Options Assignment | When Will I Be Assigned Stock?

Feb 21, 2017

By: Mike Butler

Don't let assignment cause you anxiety!

When we talk to our customers, one of their biggest fears when learning how to trade options is getting assigned stock (because remember, when you buy/sell an option, you control 100 shares of that option’s stock). Well, I’m hoping to help you put that anxiety to rest with this post.

Assignment of stock when trading options is just like being given a pop quiz in school - it’s generally unexpected, and usually not a good feeling!

Some people like to be assigned stock as a part of their strategy (i.e. one of the follow traders, Woody, likes to sell puts at a strike price that he is comfortable being assigned stock at, and will always take the assignment when his options are expiring in the money), but this post is more focused on those who do not want to be assigned stock.

The 3 most common questions we get asked related to trading options and being assigned stock are:

What situations would cause me to get assigned stock?

What can I do to prevent being assigned stock?

And…If I am assigned, what should I do?

WHEN WILL I GET ASSIGNED?

Let's tackle the first question that asks...when you invest in options, what scenario would cause you to be assigned shares of stock?

The most common way you will be assigned stock is if you short (sell) an option that expires in the money. 

Assignment Risk: Buying An Option

When you buy an option (a call or a put), you cannot be assigned stock unless you choose to exercise your option . Plain and simple, the purchaser of an option contract will always have the choice to exercise the option, but not the obligation to do so. 

Let’s say you bought an Apple (ticker symbol AAPL) option a few weeks ago that is set to expire today and the option is in the money (there is never risk of assignment if the option is not in the money), you may do one of two things:

you can let the option expire in the money, which will result in the option being exercised at your strike price and 100 open shares on Monday with a P/L equivalent to the distance between your strike price and the stock price, or...

you can exercise the option and collect 100 shares of the stock

Easy enough to understand, right?

Let’s now break that down even further, by looking at buying calls and buying puts separately to reinforce your understanding.

Assignment When Buying A Naked Call

Remember that if you buy a call, that gives you the right to buy 100 shares of stock at an agreed upon strike price . Let's take a look at an example scenario of getting assigned on a naked call.

As the call buyer, you have the choice whether or not you want to exercise the option. If you exercise your right to purchase shares of the stock (100 shares for each option contract), the seller of the call (let's call him Mike) will automatically have 100 shares called away from his account.

• Bought a FB (Facebook) call option from Mike, at a strike price of $75
• The option is expiring in the money and you decide to exercise the option
• You collect 100 shares of Facebook stock from Mike for $75/share (the strike price)
• Sold a FB (Facebook) call option to you at a strike price of $75
• The option is expiring in the money and you chose to exercise it
• Mike is forced to sell you 100 shares of Facebook stock (even if he doesn’t have the stock in his possession)

If Mike owns the stock already (like in a covered call position), his stock will be called away. If he does not own the stock, he will now be assigned -100 shares of stock per option contract. If Mike does not have enough buying power to short the stock, he will be forced to close the position immediately by his broker and will be charged an assignment fee (on top of regular commission rates).

The proper term for being assigned negative shares of stock is called being ’short stock’. Think about it like this. When you buy stock, you are taking a bullish position because the only way you profit from stock ownership, is if the stock goes up. But what if you wanted to take the opposite side of the bet by just investing in stock (a bearish position)? You would short the stock and own negative shares.

Assignment When Buying A Naked Put

If you purchase a put option, remember that that gives you the right (but not the obligation) to sell shares of stock at an agreed upon strike price. This means that if the put option expires in the money, the put seller has the obligation to purchase the stock at the same strike price. Let's again reference our example in which you are buying an option from Mike.

As the put buyer, if you exercise your right to sell stock, then Mike will automatically be sold 100 shares of stock per option contract. If the new stock is something Mike wants to keep, he certainly can if he has the available funds in his account. If he chooses to do so, he will now own 100 shares/contract at the strike price.

• Bought a FB (Facebook) put option from Mike, at a strike price of $72
• You sell 100 shares of Facebook stock to Mike for $72/share (the strike price)
• Sold a FB (Facebook) put option to you at a strike price of $72
• The option is expiring in the money and you chose to exercise it.
• Mike must purchase 100 shares of Facebook stock from you (even if he doesn’t have enough money in his account)

If Mike does not have enough capital to buy the stock, he will still own the stock temporarily, but will be forced to close the position immediately (this is usually a margin call from your broker) and he will be charged an assignment fee (in addition to the regular commission fees).

ASSIGNMENT WHEN BUYING A CALL/PUT SPREAD

Example of a long call spread - notice the green long call is in the money.

Remember that a vertical spread is made up of buying one option and selling the same type of option (both options would be calls or puts). 

Vertical spreads offer more protection than naked options when it comes to assignment. This isn’t to say there is less risk involved in actually getting assigned, but you have more tools to mitigate being long or short stock.

When buying a call spread or put spread, the risk of assignment is determined by how much of the spread is in the money. If both legs are in the money at expiration , you could still be assigned, but since your other leg is in the money, you can exercise that to collect max profit. If only one strike is in the money (the short strike - aka the option that you sold), that is where you run the risk of assignment.

When you’re the option buyer, you have the power over assignment . If you are the option seller, that is a different story...

Assignment Risk: Selling An Option

When you sell an option (a call or a put), you will be assigned stock if your option is in the money at expiration . As the option seller, you have no control over assignment, and it is impossible to know exactly when this could happen. Generally, assignment risk becomes greater closer to expiration. With that said, assignment can still happen at any time.

Let’s say you sold a GOOG (ticker symbol for Google) option a couple weeks ago that is set to expire today and the option is in the money. In this scenario, you will automatically be assigned 100 shares of stock (if you sold a call then you would be assigned -100 shares of stock and if you sold a put, you would be assigned 100 shares of stock). 

ASSIGNMENT WHEN Selling A NAKED CALL

Unlike when you are the buyer of a naked call, when you're the seller of a naked call option, you do not have control over assignment if your call expires in the money (it only has to be $.01 in the money). In this scenario, you will automatically be forced to sell 100 shares of stock to the purchaser of the option.

Let's go back to the example with you and Mike. If you sell a GOOG call option to Mike at a strike price of $525 and Mike decides to exercise (because the option is in the money), you have to sell him 100 GOOG shares per option contract for $525/share. Even if you do not have GOOG stock you will still have to sell Mike the shares (in which case you will be short 100 shares of GOOG stock).

• Bought a GOOG (Google) call option from you, at a strike price of $550
• The option is expiring in the money and Mike decides to exercise the option
• Mike collects 100 shares of Google stock from you for $550/share (the strike price)
• Sold a GOOG (Google) call option to Mike at a strike price of $550
• The option is expiring in the money and Mike chooses to exercise it
• You must sell Mike 100 shares of Google stock (even if you don’t have the stock in your possession)

Don't forget, if you do not close the trade or roll it before expiration and do have to sell the shares, you will also be charged an assignment fee and regular commission fees.

*One Important Note: there is additional assignment risk when a company has upcoming dividends (dividends are when a company distributes cash to shareholders).  Essentially, if the extrinsic value on an ITM short call is LESS than the dividend amount, the ITM call owner will have good reason to exercise their option so that they can realize the dividend associated with owning the stock.

ASSIGNMENT WHEN SELLING A NAKED PUT

Similar to selling a naked call, when you sell a naked put, you again do not have control over assignment if your option expires in the money at expiration. If your short put expires in the money at expiration, you will be assigned 100 shares of stock at the option's strike price and charged an assignment fee plus commissions.

Last time with the example, I swear (from my experience, repetition is key to understanding options): if you sell Mike a naked put that is expiring in the money and Mike chooses to exercise those shares, you will have to buy 100 shares of GOOG stock per option contract, at $525/share. And again, you will be charged an assignment fee and commission fees.

• Bought a GOOG (Google) Put Option from you at a strike price of $525
• The option is expiring in the money and you Mike chooses to exercise it. You must buy 100 shares of GOOG stock from Mike (even if you don't have enough money in your account)
• Sold a GOOG (Google) put option to Mike at a strike price of $525
• You must purchase 100 shares of Google stock from Mike (even if you don’t have enough money in your account)

ASSIGNMENT WHEN SELLING A Call/Put Spread

Example of a short call spread - notice the red short call in the money.

When you sell a put spread or call spread, the assignment risk comes from your short strike expiring in the money (just like when you buy a call/put spread). If both strikes expire in the money, they will essentially cancel each other out and you will not be assigned (you will be assigned on the short strike, and then you can excercise your long strike).

If you sell a call spread and the short strike is in the money at expiration, you will be forced to sell 100 shares per option contract to the buyer. If you sell a put spread and just the short strike is in the money at expiration, you will be assigned 100 shares of stock per contract.

Preventing Assignment

How can you avoid being assigned before it happens? There are two ways:

You can close the trade before it expires and take any profit or loss on the trade

You can roll the trade to extend the days to expiration, giving you more time to be right

When it comes to assignment, we totally understand the fear investors have. That's why the tastytrade trading platform was designed with a feature that can help prevent you from being assigned with a quick glance. Whenever you sell an option that is in the money, or has moved in the money, there is an 'ITM' symbol that will show up on your portfolio page.

Despite our best efforts to avoid unwanted assignment, it can still happen from time to time. This leaves new investors wondering what to do if this scenario occurs...

What Happens If I am assigned?

I imagine I looked a little like this when I realized I had been assigned.

Assignment can happen pretty easily if you are not monitoring you positions on a regular basis (and can happen even if you are).

Just last week, I had an ITM option expire on a day where I was wrapped up in meetings and projects, and ended up being assigned stock. If you get busy during the day or if you are trading an illiquid underlying (in which case there may not be any buyers/sellers available so you cannot close the position), this can happen to you.

We mentioned the following scenarios before, but wanted to hammer the points home in the event that you are assigned. There are two things that can happen if you sold an option that has expired in the money...

If you were assigned stock and had the money to cover the shares in your account, then you can choose to hold the long (or short) stock, or buy/sell the shares back for a profit or loss.

If you were assigned shares and don't have the money to cover the shares you were assigned (the term for this is a margin call), you will need to buy/sell back the shares ASAP. If you do not, the broker will do it for you before the end of the trading day.

There's a lot of information in this post, so let's recap the most important takeaways:

Assignment can happen at any time - it is contolled by the option buyer.

If you do not have enough funds in your account to cover long or short stock, you should close the position immediately (or your broker will do it for you).

Spreads give more protection against being assigned, but they do not protect you unless BOTH legs are in the money.

If you have a short call position, there is additional assignment risk if that call is in the money at the time of the dividend.

If you ever have any questions about assignment, don't hesitate to reach out to our support team at [email protected] !

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

Earnings & options | learn how to trade earnings.

Mike Butler

Sep 7, 2017

Most investors are familiar with what earnings are, but less know about the different strategies and considerations when investing in a company with upcoming earnings. In this post you will learn about what earnings are, the terminology associated with earnings, and how you can place an 'earnings trade.'

Delta | What It Tells You About Your Position & Portfolio

M. Slabinski

Aug 30, 2017

Instead of going through different positions and strategies to figure out which way you need the market to go to make money, delta will give you a snapshot of this information for each position, strategy, and even your overall portfolio. On the simplest level, delta (positive or negative) tells us which way we want the underlying to go to make money. 

What is Strike Price? Definition, Examples & Considerations

Jul 7, 2017

Strike price is an important options trading concept to understand. This post will teach you about strike prices and help you determine how to choose the best one.

tasty live content is created, produced, and provided solely by tastylive, Inc. (“tasty live ”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tasty live , through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tasty live is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tasty live is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures .

tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

tastytrade has entered into a Marketing Agreement with tasty live (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tasty live is the parent company of tastytrade.

tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tasty live nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on tastylive.com apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tasty live ’s podcasts as necessary to view for personal use. tasty live was previously known as tastytrade, Inc. tasty live is a trademark/servicemark owned by tastylive, Inc.

• Trading Blog

• Remember me Not recommended on shared computers

Forgot your password?

Or sign in with one of these services

• All Content
• This Article
• This Category
• Advanced Search

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Get educated about the nuances and risks of options trading. Have access to resources and be a resource to other traders. Get quick responses from the SteadyOptions team.

Everything You Need to Know About Options Assignment Risk

By Pat Crawley

The  fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account if you’re undercapitalized.

But in this article, we're going to show you why early assignment is a vastly overblown fear, why it's not the end of the world, and what to do if it does occur.

What is Assignment in Options Trading?

Do you remember reading beginner  options books  or articles that said, "an option gives the buyer the right, but not the obligation, to buy/sell a stock at a specified price and date?" Well, it's accurate, but only for the buy side of the contract.

The seller of an option is actually obligated to buy or sell should the buyer choose to exercise their contract. So when options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

Let's say you sold a call option on a stock with a strike price of $50, which you held until expiration. At expiration, the stock trades at $55, meaning it's automatically exercised by the buyer. In this case, you are forced to sell the buyer 100 shares at $50 per share.

So when selling options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

What is Early Assignment in Options Trading?

Early assignment is when the buyer of an options contract that you're short decides to exercise the option before the expiration and begins the assignment process.

Many beginning traders count early assignments as one of their biggest trading fears. Many traders' fear of early assignment stems from their lack of understanding of the process. Still, it's typically not something to worry about, and we'll show you why in this article. But first, let's look at an example of how the process works.

For instance, say we collect $1 in premium to short a 30-day put option on XYZ with a strike price of $45 while the underlying is trading at $50. Fast forward, and it's the morning of expiration day. Options will expire at the close of trading in a few hours. The underlying stock is hovering around $44.85. Our plan pretty much worked as planned until, for some reason, the holder of the option exercises the option. We're confused and don't know what's going on.

It works exactly the same way as ordinary options settlement . You fulfill your end of the bargain. As the seller of a put option, you sold the right to sell XYZ at $45. The option buyer exercised that right and sold his shares to you at $45 per share.

And now, let's break down what happened in this transaction:

• You collected $1 in premium when opening the contract  
• The buyer of the option exercises his right to sell at $45 per share.  
• You’re now long 100 shares of XYZ that you paid $45 for, and you sell them at the market price of $44.80 per share, realizing a $0.20 per share loss.  
• Your profit on the transaction is $0.80 because you pocketed $1 from the initial sale of the option but lost $0.20 from selling the 100 shares from assignment at a loss.

Why Early Assignment is Nothing to Fear

Many beginning traders count early assignments as one of their biggest trading fears; on some level, it makes sense. As the seller of an option, you're accepting the burden of a legitimate obligation to your counterparty in exchange for a premium. You're giving up control, and the early assignment shoe can, on paper, drop at any time.

Exercising Options Early Burns Money

People rarely exercise options early because it simply doesn't make financial sense. By exercising an option, you're only capturing the option's intrinsic value and entirely forfeiting the extrinsic value to the option seller. There's seldom a reason to do this.

Let's put ourselves in the buyer's shoes. For instance, we pay $5 for a 30-day call with a strike price of $100 while the underlying is trading at $102. The call has $2 in intrinsic value, meaning our call is in-the-money by $2, which would be our profit if the option expired today.

The other $3 of the option price is extrinsic value. This is the value of time, volatility, and convexity. By exercising early, the buyer of an option is burning that $3 of extrinsic value just to lock in the $2 profit.

A much better alternative would be to sell the option and go and buy 100 shares of the stock in the open market.

Viewed in this light, an option seller can’t be blamed for looking at early assignment as a good thing, as they get to lock in their premium as profit.

Your Risk Doesn’t Change

One of the biggest worries about early assignment is that being assigned will somehow open the trader up to additional risk. For instance, if you’re assigned on a short call position, you’ll end up holding a short position in the underlying stock.

However, let me prove that the maximum risk in your positions stays the same due to early assignment.

How Early Assignment Doesn’t Change Your Position’s Maximum Risk

Perhaps you collect $2.00 in premium for shorting an ABC $50/$55 bear call spread. In other words, we're short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50.

Before considering early assignment, let's determine our maximum risk on this call spread. The maximum risk for a bear call spread is the difference between the strike minus the net credit you receive. In this case, the difference between the strikes is $5, and we collect a net credit of $2, making our maximum risk on the position $3 or $300.

You wake up one morning with the underlying trading at $58 to find that the counterparty of your short $50 call has exercised its option, giving them the right to buy the underlying stock at $50 per share.

You'd end up short due to being forced to sell the buyer shares at $50. So you're short 100 shares of ABC with a cost basis of $50 per share. On that position, your P&L is -$800, the P&L on a $55 long call is +$250, on account of you paying $0.50, and the call being $3.00 in-the-money. And finally, because the option holder exercised early, you get to keep the entire credit you collected to sell the $50 call, so you've collected +$250.

So your P&L is $300. You've reached your max loss. Let's get extreme here. Suppose the price of the underlying runs to $100. Here are the P&Ls for each leg of the trade:

• Short stock: -$5,000  
• Long call: +$4,450  
• Net credit received from exercised short option: +$250  
• 5,000 - (4,450 + 250) = $300

While dealing with early assignments might be a hassle, it doesn’t open a trader up to additional risk they didn’t sign up for.

Margin Calls Usually Aren’t The End of the World

Getting a margin call due to early assignment isn't the end of the world. Believe it or not, stock brokerages have been around for a long time. They have seen early assignments many times before, and they have protocols for it.

Think about it intuitively, your broker allowed you to open the short option position knowing that the capital in your account could not cover an early assignment. Still, they let you make the trade anyways.

So what happens when you get an early assignment that you can’t cover? Your broker issues you a margin call. Once you’re in violation of their margin rules, they pretty much have carte blanche to handle the situation as they wish, including liquidating the assigned stock position at their will.

However, most brokers will give you some time to react to the situation and either decide to deposit more capital, liquidate the position on your own, or exercise offsetting options to fulfill the margin call in the case of an option spread.

Even though a margin call isn't fun, remember that the overall risk of your position doesn't change due to an early assignment, and it's typically not a momentous event to deal with. You probably just have to liquidate the trade.

When Early Assignment Might Occur?

Dividend Capture

One of the few times it might make sense for a trader to exercise an option early is when he's holding a call that is deep in-the-money, and there's an upcoming ex-dividend date.

Because deep ITM calls have very little extrinsic value (because their deltas are so high), any negligible extrinsic value is often outweighed by the value of an upcoming dividend payment , so it makes sense to exercise and collect the dividend.

Deep In-The-Money Options Near Expiration

While it's important to emphasize that the risk of early assignment is very low in most cases, the likelihood does rise when you're dealing with options with very little extrinsic value, like deep-in-the-money options. Although, even in those cases, the probabilities are pretty low.

However, an options trader that is trading to exploit market anomalies like the volatility risk premium, in which implied volatility tends to be overpriced, shouldn't even be trading deep-in-the-money options anyhow. Profitable option sellers tend to sell options with very little intrinsic value and tons of extrinsic value.

Bottom Line

Don't let the  fear of early assignment discourage you from selling options. Far worse things when shorting options! While it's true that early assignment can occur, it's typically not a big deal. Related articles

• Can Options Assignment Cause Margin Call?
• Assignment Risks To Avoid
• The Right To Exercise An Option?
• Options Expiration: 6 Things To Know
• Early Exercise: Call Options
• Expiration Surprises To Avoid
• Assignment And Exercise: The Mental Block
• Should You Close Short Options On Expiration Friday?
• Fear Of Options Assignment
• Day Before Expiration Trading
• Accurate Expiration Counting

What Is SteadyOptions?

12 Years CAGR of 127.5%

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Featured Articles

Useful resources, recent articles, is there a ‘free lunch’ in options.

In olden times, alchemists would search for the philosopher’s stone, the material that would turn other materials into gold. Option traders likewise sometimes overtly, sometimes secretly hope to find that most elusive of all option positions: the risk free trade with guaranteed positive outcome:

By TrustyJules, May 28

• 10,407 views

• Comment by Jasper

What Are Covered Calls And How Do They Work?

A covered call is an options trading strategy where an investor holds a long position in an asset (most usually an equity) and sells call options on that same asset. This strategy can generate additional income from the premium received for selling the call options.

By Kim, May 18

• 1,886 views

• Added by Kim

SPX Options vs. SPY Options: Which Should I Trade?

Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

By Mark Wolfinger, March 15

• 4,687 views

• Added by Mark Wolfinger

Yes, We Are Playing Not to Lose!

There are many trading quotes from different traders/investors, but this one is one of my favorites: “ In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

By Kim, March 11

• 3,352 views

The Impact of Implied Volatility (IV) on Popular Options Trades

You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

By Yowster, March 7

• 5,335 views

• Added by Yowster

Please Follow Me Inside The Insiders

The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

By TrustyJules, March 5

• 2,872 views

• Added by TrustyJules

Trading Earnings With Ratio Spread

A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

By TrustyJules, February 22

• 3,946 views
• February 22

SteadyOptions 2023 - Year In Review

2023 marks our 12th year as a public trading service.   We closed 192 winners out of 282 trades (68.1% winning ratio).   Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade.   We had only one losing month and one essentially breakeven in 2023. 

By Kim, January 5

• 8,548 views

Call And Put Backspreads Options Strategies

A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

By Chris Young, October 14, 2023

• 12,413 views

• Added by Chris Young
• October 14, 2023

Long Put Option Strategy

A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is  Delta  negative,  Vega  positive and   Theta  negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

By Chris Young, October 11, 2023

• 13,727 views
• October 11, 2023

We want to hear from you!

There are no comments to display.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!

Already have an account? Sign in here.

• Existing user? Sign In
• Education Center
• Members Reviews
• SteadyOptions Strategy
• Anchor Trades Strategy
• Simple Spreads Strategy
• Steady Collars Strategy
• SteadyVIX Strategy
• SteadyYields Strategy
• Managed Accounts
• Performance

• Machine Learning
• Portfolio Optimization
• Trading Strategies
• Backtesting
• Technical Analysis

Everything You Need to Know About Options Assignment Risk

But in this article, we’re going to show you why early assignment is a vastly overblown fear, why it’s not the end of the world, and what to do if it does occur.

What is Assignment in Options Trading?

Do you remember reading beginner  options books  or articles that said, “an option gives the buyer the right, but not the obligation, to buy/sell a stock at a specified price and date?” Well, it’s accurate, but only for the buy side of the contract.

The seller of an option is actually obligated to buy or sell should the buyer choose to exercise their contract. So when options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

Let’s say you sold a call option on a stock with a strike price of $50, which you held until expiration. At expiration, the stock trades at $55, meaning it’s automatically exercised by the buyer. In this case, you are forced to sell the buyer 100 shares at $50 per share.

So when selling options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

What is Early Assignment in Options Trading?

Early assignment is when the buyer of an options contract that you’re short decides to exercise the option before the expiration and begins the assignment process.

Many beginning traders count early assignments as one of their biggest trading fears. Many traders’ fear of early assignment stems from their lack of understanding of the process. Still, it’s typically not something to worry about, and we’ll show you why in this article. But first, let’s look at an example of how the process works.

For instance, say we collect $1 in premium to short a 30-day put option on XYZ with a strike price of $45 while the underlying is trading at $50. Fast forward, and it’s the morning of expiration day. Options will expire at the close of trading in a few hours. The underlying stock is hovering around $44.85. Our plan pretty much worked as planned until, for some reason, the holder of the option exercises the option. We’re confused and don’t know what’s going on.

It works exactly the same way as ordinary options settlement . You fulfill your end of the bargain. As the seller of a put option, you sold the right to sell XYZ at $45. The option buyer exercised that right and sold his shares to you at $45 per share.

And now, let’s break down what happened in this transaction:

• You collected $1 in premium when opening the contract  
• The buyer of the option exercises his right to sell at $45 per share.  
• You’re now long 100 shares of XYZ that you paid $45 for, and you sell them at the market price of $44.80 per share, realizing a $0.20 per share loss.  
• Your profit on the transaction is $0.80 because you pocketed $1 from the initial sale of the option but lost $0.20 from selling the 100 shares from assignment at a loss.

Why Early Assignment is Nothing to Fear

Many beginning traders count early assignments as one of their biggest trading fears; on some level, it makes sense. As the seller of an option, you’re accepting the burden of a legitimate obligation to your counterparty in exchange for a premium. You’re giving up control, and the early assignment shoe can, on paper, drop at any time.

Exercising Options Early Burns Money

People rarely exercise options early because it simply doesn’t make financial sense. By exercising an option, you’re only capturing the option’s intrinsic value and entirely forfeiting the extrinsic value to the option seller. There’s seldom a reason to do this.

Let’s put ourselves in the buyer’s shoes. For instance, we pay $5 for a 30-day call with a strike price of $100 while the underlying is trading at $102. The call has $2 in intrinsic value, meaning our call is in-the-money by $2, which would be our profit if the option expired today.

The other $3 of the option price is extrinsic value. This is the value of time, volatility, and convexity. By exercising early, the buyer of an option is burning that $3 of extrinsic value just to lock in the $2 profit.

A much better alternative would be to sell the option and go and buy 100 shares of the stock in the open market.

Viewed in this light, an option seller can’t be blamed for looking at early assignment as a good thing, as they get to lock in their premium as profit.

Your Risk Doesn’t Change

One of the biggest worries about early assignment is that being assigned will somehow open the trader up to additional risk. For instance, if you’re assigned on a short call position, you’ll end up holding a short position in the underlying stock.

However, let me prove that the maximum risk in your positions stays the same due to early assignment.

How Early Assignment Doesn’t Change Your Position’s Maximum Risk

Perhaps you collect $2.00 in premium for shorting an ABC $50/$55 bear call spread. In other words, we’re short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50.

Before considering early assignment, let’s determine our maximum risk on this call spread. The maximum risk for a bear call spread is the difference between the strike minus the net credit you receive. In this case, the difference between the strikes is $5, and we collect a net credit of $2, making our maximum risk on the position $3 or $300.

You wake up one morning with the underlying trading at $58 to find that the counterparty of your short $50 call has exercised its option, giving them the right to buy the underlying stock at $50 per share.

You’d end up short due to being forced to sell the buyer shares at $50. So you’re short 100 shares of ABC with a cost basis of $50 per share. On that position, your P&L is -$800, the P&L on a $55 long call is +$250, on account of you paying $0.50, and the call being $3.00 in-the-money. And finally, because the option holder exercised early, you get to keep the entire credit you collected to sell the $50 call, so you’ve collected +$250.

So your P&L is $300. You’ve reached your max loss. Let’s get extreme here. Suppose the price of the underlying runs to $100. Here are the P&Ls for each leg of the trade:

• Short stock: -$5,000  
• Long call: +$4,450  
• Net credit received from exercised short option: +$250  
• 5,000 – (4,450 + 250) = $300

While dealing with early assignments might be a hassle, it doesn’t open a trader up to additional risk they didn’t sign up for.

Margin Calls Usually Aren’t The End of the World

Getting a margin call due to early assignment isn’t the end of the world. Believe it or not, stock brokerages have been around for a long time. They have seen early assignments many times before, and they have protocols for it.

Think about it intuitively, your broker allowed you to open the short option position knowing that the capital in your account could not cover an early assignment. Still, they let you make the trade anyways.

So what happens when you get an early assignment that you can’t cover? Your broker issues you a margin call. Once you’re in violation of their margin rules, they pretty much have carte blanche to handle the situation as they wish, including liquidating the assigned stock position at their will.

However, most brokers will give you some time to react to the situation and either decide to deposit more capital, liquidate the position on your own, or exercise offsetting options to fulfill the margin call in the case of an option spread.

Even though a margin call isn’t fun, remember that the overall risk of your position doesn’t change due to an early assignment, and it’s typically not a momentous event to deal with. You probably just have to liquidate the trade.

When Early Assignment Might Occur?

Dividend Capture

One of the few times it might make sense for a trader to exercise an option early is when he’s holding a call that is deep in-the-money, and there’s an upcoming ex-dividend date.

Because deep ITM calls have very little extrinsic value (because their deltas are so high), any negligible extrinsic value is often outweighed by the value of an upcoming dividend payment , so it makes sense to exercise and collect the dividend.

Deep In-The-Money Options Near Expiration

While it’s important to emphasize that the risk of early assignment is very low in most cases, the likelihood does rise when you’re dealing with options with very little extrinsic value, like deep-in-the-money options. Although, even in those cases, the probabilities are pretty low.

However, an options trader that is trading to exploit market anomalies like the volatility risk premium, in which implied volatility tends to be overpriced, shouldn’t even be trading deep-in-the-money options anyhow. Profitable option sellers tend to sell options with very little intrinsic value and tons of extrinsic value.

Bottom Line

Don’t let the  fear of early assignment discourage you from selling options. Far worse things when shorting options! While it’s true that early assignment can occur, it’s typically not a big deal.

Related articles

• Can Options Assignment Cause Margin Call?
• Assignment Risks To Avoid
• The Right To Exercise An Option?
• Options Expiration: 6 Things To Know
• Early Exercise: Call Options
• Expiration Surprises To Avoid
• Assignment And Exercise: The Mental Block
• Should You Close Short Options On Expiration Friday?
• Fear Of Options Assignment
• Day Before Expiration Trading
• Accurate Expiration Counting

This post originally published at https://steadyoptions.com/articles/everything-you-need-to-know-about-options-assignment-risk-r738/ .

Index Options vs. Stock Options: What’s The Difference?

What are cash-settled options, related posts.

SPX Options vs. SPY Options: Which Should I Trade?

What's the Difference Between SPX and SPY Options? Dividends Dividends are not normally paid to options holders. However, SPY pays a...

Yes, We Are Playing Not to Lose!

A few weeks ago we introduced a new strategy to our members. While a double diagonal spread is a well...

The Impact of Implied Volatility (IV) on Popular Options Trades

This article will shows how this works, and how IV can affect your decision on what type of trade to...

Please Follow Me Inside The Insiders

Insider Buying and Selling In doing so we are competing with quant-based analysis that is poring hundreds of millions of...

Trading Earnings With Ratio Spread

Ratio trading the earnings Everyone knows what a ratio trade is right? A ratio can be found in many shapes,...

The SMCI Parabolic Top — A Trade Breakdown

8:00 AM on Friday morning on a chilly February the 16th. One person is blowing up my gchat with comments...

Why your live trading is so much worse than your Backtests?

Percentile Rank Comparison Blocks

Leave a reply cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Sharpe Ratio: Calculation, Interpretation and Analysis

AutoRegressive Fractionally Integrated Moving Average (ARFIMA) model

Johansen Cointegration Test: Learn How to Implement it in Python

Supertrend indicator trading strategy – (backtest, settings, formula, and performance).

Implement a custom AutoML job using pre-selected algorithms in Amazon SageMaker Automatic Model Tuning

ChatGPT for Trading: Strategies, Prompts, and More

Build an end-to-end MLOps pipeline for visual quality inspection at the edge – Part 1

Mistral 7B foundation models from Mistral AI are now available in Amazon SageMaker JumpStart

Emini bears want give up bar, quantpedia premium update – march 20th.

Sell in May and Go Away: Definition, Strategy Backtest, History, and Statistics

Recent news.

© 2023 QuantInfo - Unleashing the Power of Data in Algorithmic Trading Analyzing.

Navigate Site

• Privacy & Policy

Welcome Back!

Login to your account below

Remember Me

Retrieve your password

Please enter your username or email address to reset your password.

Stack Exchange Network

Stack Exchange network consists of 183 Q&A communities including Stack Overflow , the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Q&A for work

Connect and share knowledge within a single location that is structured and easy to search.

What are my risks of early assignment?

I have started writing covered puts and calls recently. Everything I read talks about the risk of early assignment of your position, but I don't really understand how often this happens. It seems that you should only exercise an option when the extrinsic value is lower than the brokerage fees for buying/selling the stock (say about $0.10). Otherwise you could always make more money by selling the option than exercising (assuming there are no dividend payouts on the underlying stock). It seems only an irrational investor would exercise an option with time value left on it, and I assume that is exceedingly rare.

I've read that early assignment of a put is more likely than a call as the money is flowing to the exerciser rather than from, which is more likely to happen early (money in as early as possible vs money out as late as possible). But it seems to me that the contract holder would still get more money if they just sold the contract (and their stock if they're holding it). Am I doing that math right?

I am trading ETFs and will start with ETNs soon. So the detailed questions are:

• At what level of extrinsic value does the possibility of assignment become likely?
• Is there really a risk of early assignment if there's time value left? Or is this just some CYA verbage that everyone includes because it is technically possible?
• Does that risk change when you are looking at ETN vs ETF vs Company Stock? How?
• Does the risk change between a put and a call?
• option-exercise
• covered-call
• options-assignment

• Uh...Possible duplicate? money.stackexchange.com/questions/5696/… . I promise I searched first, but I didn't find anything. SE didn't suggest anything useful when I wrote it, either. I just found the other answer through the [options-assignment] tag. Please close if I haven't asked anything new. –  yossarian Commented Jan 20, 2012 at 16:48

3 Answers 3

One reason this happens is due to dividends. If the dividend amount is greater than the time value left on a call, it can make sense to exercise early to collect the dividend.

Deep in the money puts also may get exercised early. There's usually little premium on a deep in the money put and the spread on the bid-ask might erase what little premium there is. If you have stock worth $5,000 but own puts on them that will give you $50,000 upon exercise (and no spread to worry about), the interest you can gain on the $50k might be more than the little to no time value left on the position... even at several weeks to expiration.

• There's no profitable arb in exercising a deep ITM call to capture the dividend (where the time premium is less than the dividend). That applies to the put, not the call. –  Bob Baerker Commented Oct 23, 2018 at 18:51

Per CBOE stats, only about 7% of options are exercised.

There are several reasons why an option might be exercised early:

The owner doesn't know any better and throws away remaining time premium, not realizing that he'd salvage that time premium by selling the option. This is rare.

The time premium is low and exit costs (commissions and B/A spread) are lower than selling the option. This is an infrequent occurrence because most firms charge for exercise, sometimes more than a simple sell commission.

An ITM option trades at a discount (the bid is less than the intrinsic value) and selling to close would be a haircut. Taking the opposing position in the underlying and exercising the option would avoid the haircut. This discount occurs regularly but even more often just before the ex-dividend date. For example:

XYZ is $40 Jan $35 call is $4.80

The intrinsic value of the call is 5 points. Buy the call for $4.80, shorts the stock at $40 and exercise the call to buy the stock at $35 (- 4.80 + 40.00 - 35.00 = + 20 cent profit)

Speaking of dividends, it's an incorrect statement that ITM calls are exercised early if the time premium remaining is less than the pending dividend. This was stated in another answer and is often found across the net. If you run the numbers, you'll see that you are just throwing away the time premium and that the arb loses money.

XYZ is $40 Jan $35 call is $5.30 Ex div is tomorrow for 50 cts

Buy call, exercise to buy stock, sell stock after ex-div

• $35.00 - $5.30 + $39.50 + $.50 = - 20 cts (loser)

This assumes that you can sell the stock on ex-div morning for the adjusted close.

It is true that a dividend arbitrage is available when the time premium of an ITM put is less than the amount of the dividend. For example:

XYZ is $40 Jan $45 put is $5.30 Ex div is tomorrow for 50 cts

Buy stock/buy put, exercise after ex-div

• $40.00 - $5.30 + $45.00 + $.50 = + 20 cents

The put vs call assignment risk, is actually the reverse: in-the-money calls are more likely to be exercised early than puts. Exercising a call locks in profit for the option holder because they can buy the shares at below market price, and immediately sell them at the higher market price. If there are dividends due, the risk is even higher. By contrast, exercising an in-the-money put locks in a loss for the holder, so it's less common.

• This answer that "exercising an in-the-money put locks in a loss for the holder" makes no sense. It could be a profitable put that went ITM. It could be an ITM option exercised to avoid the haircut of the bid trading below intrinsic value. it could be part of a Discount Arbitrage. It could be because the holder is unloading a position in the underlying. So many reasons, some profitable some not, depending on the P&L of the option and possibly a married position in the underlying. –  Bob Baerker Commented Oct 23, 2018 at 18:50

You must log in to answer this question.

Not the answer you're looking for browse other questions tagged options option-exercise covered-call options-assignment ..

• Featured on Meta
• Join Stack Overflow’s CEO and me for the first Stack IRL Community Event in...
• Bringing clarity to status tag usage on meta sites

Hot Network Questions

• Why does each leg of my 240V outlet measure 125V to ground, but 217V across the hot wires?
• Common Indoeuropean Phonotactics Rules
• The meaning of "sharp" in "sharp sweetness"
• Could they free up a docking port on ISS by undocking the emergency vehicle and letting it float next to the station for a little while
• I want to be a observational astronomer, but have no idea where to start
• Has anyone returned from space in a different vehicle from the one they went up in? And if so who was the first?
• Inspector tells me that the electrician should have removed green screw from the panel
• Textile Innovations of Pachyderms: Clothing Type
• Why public key is taken in private key in Kyber KEM?
• Curve factor at position
• I am trying to update but its giving error and I am not getting whats's the issue
• Is there any benefit to declaring an index that contains a primary key as unique?
• Model reduction in linear regression by stepwise elimination of predictors with "non-significant" coefficients
• Did Queen (or Freddie Mercury) really not like Star Wars?
• Is it possible for one wing to stall due to icing while the other wing doesn't ice?
• Movie / episode where a spaceplane is stuck in orbit
• Who was the French detective mentioned in Hitchcock's "Shadow of a Doubt"?
• Can a V22 Osprey operate with only one propeller?
• Syntactically, who does Jesus refer to as 'to you' and 'those outside' in Mark 4:11?
• Colossians 1:16 New World Translation renders τα πάντα as “all other things” but why is this is not shown in their Kingdom Interlinear?
• Is the product of two NONZERO elements independently drawn from a prime field uniformly distributed?
• The pronoun in short yes/no answers to rhetorical tag-questions with the generic "you"
• Why wasn't Randall Stevens caught?
• Please help me identify my Dad's bike collection (80's-2000's)

• The PowerX Optimizer Software
• My Trading Routine with the PXO
• Schedule a Free Tour
• PXO Roadmap & Updates
• The Wheel Options Strategy Book
• The PowerX Strategy
• The Complete Guide to Day Trading
• Rockwell Freedom Mastermind
• Coffee Mugs
• Accessories
• My Trading Plan
• Wheel Options 101
• Markus Up Close and Personal
• Knowledge Base
• Learning Center
• Daily Stock Market News
• The Truth About Trading
• Client Stories
• PowerX Optimizer Login
• Mighty Networks Login
• Referral Partner Login
• Options Assignment Risk
• Coffee With Markus

What is the options assignment risk?

Trading options is a very lucrative way to make money in the stock market. Using the same methods that I teach in my trading PowerX Trading Strategy, I was able to turn a 25k account into a 45k account in 2 months!

If you’d like to learn more about this strategy, you can get the book for FREE! Just pay shipping and handling. Click HERE  

25K to 45K in 2 months? This sounds too good to be true… and I would like to tell you that it is NOT too good to be true, but there are some inherent risks associated with options trading. 

ONE of the biggest risks, and possibly the MOST common risk associated with trading options are options assignment risks.  

As you may know by now, options contracts expire. When you purchase an options contract you have the right to exercise the contract, and buy or sell the underlying asset for the agreed-upon price. If you allow the contract to expire in the money (ITM) you run the risk of being assigned the 100 shares of the underlying stock. 

This is known as an options assignment risk.

Specific Examples of Options With Different Expiration Dates

In the example we’re going to discuss today, we’re going to look at how options expiration or the length of time to expiration can affect your options assignment risk.  

To illustrate the relationship between options assignment risk and options expiration, we’re going to look at trading a 315 call options contract on Apple ( AAPL) with 7 days left until expiration. The current strike price of AAPL is 318. 

This options contract is currently trading for $6 , but only has $3 of intrinsic value. If you were to exercise the option, you would be able to purchase the AAPL stock for $315, and you would capture $3 of profit. If you sell the option, you’ll earn twice that, because the options contract is selling for $6 .

The difference in the cost of the intrinsic value ($3) of the option and actual value ($6) of the option has to do with time decay. As the option contract gets closer to its expiration date, time decay erodes the value of the options contract. 

In our next example, we’ll look at trading the same options contract with a $315 strike price, but with 0 days to expiration. 

As you can see in this image, the same contract with zero days until expiration has only $3 of value. Time decay, otherwise known as theta, has slowly eaten away the value of the contract so that now there is only the intrinsic value of the option left.

On a side note: Selling Theta is a very powerful way to make money while trading. I have taught thousands of traders to use Theta, or the time decay of options, to produce income while trading options. If you’d like to learn more about the Theta Kings class, click HERE  

Options Expiration

As an options contract nears expiration, the risk of options assignment increases exponentially. When an options contract has been purchased, it can usually be sold before expiration to prevent an assignment. 

However, options contracts that have been sold pose the opposite risk. If you have sold a put contract for example, and the options contract is in the money at expiration, you must either buy back the contract BEFORE expiration, or risk options assignment. 

In this next example, we will look at selling a put contract on Herts (HTZ). 

The current price strike price of HTZ is $2.87.

If you were to SELL a $3 put option on HTZ, the option would have the intrinsic value of .13 cents! Meaning if you chose to exercise the option, you would only make .13 cents per share. 

If we look at this option with 1 week out until expiration we can see that it has more value because time decay has not eroded the value. 

In the image of the HTZ option chain above we can see that the $3 dollar put option with one week until expiration has .85 cents of value.

To Exercise or to Sell, That Is The Question

As you can see, there’s WAY more profit when selling a contract vs exercising a contract when there is time to expiration. 

In summary, it’s very unlikely that someone will exercise an options contract when there is time remaining before expiration. There is usually more profitability when there is less time decay or Theta decay in the contract. 

When should you worry about options assignment risk?

Some traders are under the impression that IF the stock price moves below or above your strike price (depending on whether you sold a put or call) you risk assignment immediately. This is NOT true. You risk assignment the closer your contract gets to expiration. 

Related Posts

Best Vertical Spread Option Strategy

What type of trader are you, a beginner’s guide to buying vs selling options, how to sell put options: margin requirements explained, leave a reply.

Your email address will not be published. Required fields are marked

Email * * *

Empowering You With Knowledge That Can Change Your Life

Learning Investment With Jason Cai

What Is Early Assignment Risk In Options Trading? Who Is Affected & How To Mitigate It?

In options trading (American style), the options contract owner (or buyer) has the right to exercise the options contract anytime between the start of the contract and the expiration date. An early assignment means the options contract buyer chooses to exercise the contract before the expiration date.

However, it is usually rare as there is a time value as part of the premium that he has paid for when the options contract was established. An early assignment would mean that he would forgo some of the premium he had paid when the contract was established.

Who Is At Risk Of Early Assignment?

However, there are a few scenarios where early assignment (exercise) of a contract may happen and it is important for the options seller to take note of them, especially if he has no intention to buy ( PUT contract) or sell ( CALL contract) his shares. The risk applies to the options contract sellers because only the options buyer has the right to exercise the contract anytime before the expiration date.

The PUT options seller may just want to collect a premium through selling a PUT options contract and has no intention of owning the shares. Thus, he would hope that the PUT options contract that he sold would expire worthless instead of expiring In-The-Money (ITM) .

I am in this group when I use the SOP strategy to collect monthly income through selling OTM PUT options contracts: My Options Trading Strategy For 2023 | Introducing SOP Options Trading Strategy

In another scenario, the PUT seller may not have enough capital to purchase the shares, which means it is not a cash-secured PUT , where the seller has set aside capital to purchase the shares if he gets assigned the contract.

This is possible with a margins account: How I Use My Margins Account To Earn Extra Income (Safely)? | How My Margins Account Help In My Selling PUT Strategy?

In another group of CALL options sellers who are at risk, the seller may not wish to sell away his shares at the strike price, which he could have set much lower than his breakeven pricing. It may also be a naked short CALL, whereby the seller may not have the shares to honor the contract if it gets assigned early.

What Are The Possible Scenarios Of Early Assignment?

The risk of assignment for the CALL options contract sellers increases when the underlying stock pays dividends and when it is nearing the ex-dividend date. The CALL options contract buyers are not entitled to dividend payments, so if they wish to receive the dividend, they will have to exercise the CALL options and become stock owners.

If the upcoming dividend amount is larger than the time value remaining in the call’s price, it makes sense to exercise the option contract. But the CALL buyers will have to exercise the options contract prior to the ex-dividend date.

So for CALL options sellers who do not wish to get assigned, always be mindful if you are selling a stock that is paying dividends, and do take note if the ex-dividend date is close to the expiration date, the call options contract is in-the-money, and the dividend is relatively large. All these scenarios will significantly increase the chance of early assignment.

For PUT options contract sellers , the risk will increase in the scenario whereby the buyer is in an advantageous position and wishes to sell away his shares to collect the cash. However, he must factor the time value into the equation, before deciding if it is indeed a wise decision to exercise the PUT options early.

For PUT options contract buyers, it is usually a good idea to sell the put first and then immediately sell the stock. That way, he can capture the time value for the put along with the value of the stock. However, as expiration approaches and time value becomes negligible, early exercise seems plausible. That’s because by exercising the PUT contract, the PUT buyer can accomplish his aim of selling the shares and collecting the capital, all in one simple transaction without any further hassles or extra commission charges.

Therefore, for PUT options contract sellers, remember that the less time value there is in the price of the option as the expiration date nears, the higher the risk of an early assignment. So keep a close eye on the time value left in your short puts and have a plan in place in case you’re assigned early.

For PUT options contract sellers, an approaching ex-dividend date can be a deterrent against early exercise for PUT. By an early assignment, the options contract buyer will receive the cash now. However, this will create a short sale of stock if the PUT owner wasn’t owning the stock in the first place. So exercising the PUT options the day before an ex-dividend date means the PUT buyer will have to pay the dividend. So, this means PUT sellers may have a lower chance of being assigned early, but only until the ex-dividend date has passed.

Concluding Thoughts

To summarise, an options contract buyer (owner) will exercise early if certain conditions are met to ensure that what he receives is more than enough to cover the remaining time value in the contract (which he has already paid upfront when the contract was established).

For CALL buyers, it would be the dividends paid out, that are greater than the remaining time value. For PUT buyers, it would be the increase in premium (due to the underlying share price moving in the intended direction, i.e. stock price collapsing) being greater than the remaining time value in the contract.

In a nutshell, as the difference between the intrinsic value (the difference between the current price of a stock and the strike price of the option) and the extrinsic value (the difference between the market price of an option and its intrinsic value) increases, the risk of early assignment also increases. So, to manage the risk of early assignment, the options seller must be mindful of the increasing intrinsic value and the decreasing extrinsic value.

To mitigate against early assignment, the options contract seller can prolong the contract duration by rolling it to a later date and collecting more upfront premiums in the process. This also increases the extrinsic value of the options contract. Alternatively, he can also avoid selling CALL options on stocks that pay dividends or with an expiration date close to the ex-dividend date.

*** SEE MY TRADES & PORTFOLIO ON PATREON ***

If you are interested to find out more about my options trades and investment portfolio, I will be updating them on Patreon (on the same day I made the trades), so do follow me there if you need some reference or inspiration.

*** EARN FREE MONEY ***

Sign up for WeBull Securities Brokerage and sure-win free shares: Receive Free Money When You Sign Up With WeBull Securities Platform

*** FREE BEGINNER GUIDE TO OPTIONS TRADING ***

Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free! The Newbie’s Guide To Options Trading

*** FREE MOTIVATIONAL BOOK ***

If earning more money from your investment does not excite you anymore, you may be seeking a purpose that brings fulfillment and meaning in life. I have written a motivational book that may be useful to you in some ways. You can also download a free copy here: https://learninginvestmentwithjasoncai.com/finding-the-magical-realm-of-happiness-motivational-book

*** FOLLOW US ON SOCIAL MEDIA ***

Follow me on Facebook , LinkedIn , to get notified of my latest posts on social media. Or subscribe to my blog (scroll to the bottom of the page) to have my new posts sent directly to your mailbox.

*** BUY ME A CUP OF COFFEE ***

If my blog has benefited you in some ways and you would like to offer a token of appreciation, you may do so via this page . Thank you very much for your support!

*** MUST-READ BLOG POSTS *** After accumulating more than 600k of unrealized losses on my portfolio, I wrote this article to encourage friends and investors who are also losing a lot of money to the market. If You Are Feeling Depressed From Losing Lots Of Money In The Stock Market, Here’s An Article For You

In the 10 years of my investing journey, I have made many mistakes but also learned many lessons from these mistakes. I compiled the 10 most valuable lessons that I have learned and may they help you succeed in your investing journey. Happy 10 Years Of Investing | 348k (Realised) Profit, 635k (Unrealized) Loss & 10 Lessons Learnt

The precious 6 lessons I learnt after cutting more than half a million of losses in the stock market through bad investments and risky trades. 6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading

How I managed to build a 1M investment/ trading portfolio despite coming from humble beginnings. How A Poor Kid Got To A 1M Investment Portfolio | Tips & Principles Of Building Wealth

I did these 10 side hustles while holding a full-time job, so I share them here so you can be inspired to grow your wealth through a side hustle that you enjoy. I Did These 10 Side Hustles While Working Full Time | 10 Side Hustle Ideas To Help You Earn An Extra Income

Struggling with inflation and high cost of living? Try these 10 methods to help you save money and accumulate more savings for investments or rainy days. 10 Ways To Save Money To Help You Fight Inflation & Rising Costs Of Living

Why I am building $120,000 of cash reserves in Singapore Savings Bonds (SSB) & 5 reasons why I think SSB is a worthy low or zero-risk investment that you can consider. Why I Am Building $120,000 Of Cash Reserves In Singapore Savings Bonds (SSB)? | 5 Reasons Why SSB Is A Worthy Low-Risk Investment

Sharing why I am doing Dollar Cost Average (DCA) into SPY and QQQ ETF for long-term investments and a step-by-step guide to doing it automatically with Interactive Brokers. Why I Am Doing DCA (Automatically) For SPY & QQQ For My Long Term Investment? (20% ~ 30% Upside Potential) | Step By Step Guide To Activating Automatic Recurring Investment On IBKR

Can options trading provide you with extra sideline income every month? In this post, I share my experience of generating income from options trading over the last 3 years. Options Trading For Passive Income: Truth Or Myth?

Share this:

Leave a comment cancel reply.

Legal Disclosure: I’m not a financial advisor. The information contained in this blog is for sharing purposes only. Before investing, please consult a licensed professional. Any stock purchases I show on my blog should not be considered “investment recommendations”. I shall not be held liable for any losses you may incur for investing and trading in the stock market in an attempt to mirror what I do. Unless investments are FDIC insured, they may decline in value and/or disappear entirely. Please be careful!

• Already have a WordPress.com account? Log in now.
• Subscribe Subscribed
• Copy shortlink
• Report this content
• View post in Reader
• Manage subscriptions
• Collapse this bar

projectfinance

Step up your finance game.

Short Call And Put Options Are Rarely Assigned. Here’s Why.

Last updated on February 14th, 2022 , 08:22 am

Short Call And Put Options Are Rarely Assigned. Here’s Why.

In fifteen years as an options broker, I don’t recall once dealing with an advisor or customer who traded options with the intent of transferring their options into stock, which happens during the exercise/assign process. Whenever assignments did happen, there was seldom a happy person on the other end of the line. 

This makes sense – if you want the stock, why not just buy/sell it outright? You have infinite flexibility when buying/selling stock. You can choose the number of shares, the price of execution, and even the time of your fill.

This isn’t always the case with options. When we’re talking option assignment/exercisement, we’re talking about round lots of 100 shares. This is very costly and rarely matches an investor’s risk profile (100 shares of AMZN would currently cost you $360,000). Additionally, with short option positions , sometimes you don’t know when/if you’ll be assigned. 

Assignment Risk Odds

This assignment risk, however, is often minimal and can be mitigated entirely if you understand the product you are trading. In this article, projectoption takes a deep dive into option assignment and shows why this common fear for investors short call and put options rarely materializes. At the heart of the rationale behind all option exercisements and assignments is something called “extrinsic value”, which we will examine closely.

Before we get started, let’s do a brief recap of how the exercise/assign process works. We are first going to do a recap of American and European styled options as the latter has no assignment risk.

• Only “American Style” options can be early exercised/assigned.
• An option’s value is composed entirely of “intrinsic” or “extrinsic” value.
• Intrinsic value is the amount an option is in-the-money-by.
• Extrinsic value  (implied volatility + time decay)  is the difference between the market price of an option and its intrinsic value.
• In-the-money call options could face dividend-risk.

Why Options Are Rarely Assigned

European vs american style options.

If you own a call or put option, you generally will have the right to exercise that option at any time before the expiration. The exception to this rule is European-style options, such as S&P 500 Index ( SPX ) and the NASDAQ-100 Index ( NDX ). These index options are cash-settled at the expiration date, so they cannot be exercised prior to expiration. 

However, the vast majority of tradable options are American style, meaning they can be exercised at any time. This applies to nearly all options on equities. If you’d like an education on how these two styles of options differ, please read our article SPX vs SPY: Here’s How They Differ . If you’re interest in trading volatility, our VIX vs VIX article may be more fitting. 

Since there is no assignment risk with European Style index options, this article is going to focus on American style options. If you truly want to eradicate all risks of early assignment, simply stick with European styled options and you’ll have nothing to worry about.

Exercising a Call/Put Option

The owner of long (American style) call and put options have the right to exercise their position at any time prior to that options expiration. If you exercise a call option, you will convert that option into stock by purchasing 100 shares of the underlying stock at the call’s stock price. 

If you are long a call option with a strike price of $120 and decide to exercise this option, two transactions will occur.

• You will buy 100 shares of that stock at $120/share
• The party that is short that particular option will be assigned, and forced to sell 100 shares at $120, leaving a short position of 100 shares in their account .

Why may an investor consider exercising a long call contract? 

Let’s say that the price of the underlying on that $120 call is currently trading at $135. If you’re long that call, you could exercise that contract, obtain the long shares for $120, then immediately sell it for its current market price of $135, netting a profit of $15/share. That $15 is also known as the option’s “intrinsic value”. Let’s go over what this term means next.

Intrinsic Value

Intrinsic value in options trading is the difference between the current price of a stock and the strike price of the option. Only in-the-money options have intrinsic value. This value represents the benefit of buying (calls) or selling (puts) shares of stock at the options strike price rather than the current stock price.

Here’s are the details of our trade above.

   Call Strike Price: $120

   Current Stock Price: $135

   Intrinsic value: $15

If we exercise our long call, we will purchase the shares $15 below the market price, which is obviously advantageous. But is this the most profitable way to cash in on our option? Absolutely not. In fact, we’ll be giving money away. Let’s next learn about extrinsic value to determine why.

Extrinsic Value

All option values are composed of intrinsic and/or extrinsic values. Extrinsic value ( implied volatility + time decay (theta) is the difference between the market price of an option and its intrinsic value. In other words, it’s everything that’s “leftover” from intrinsic value. 

The below visual illustrates the different components of an option’s value. 

Not all options have intrinsic value. Actually, the value of out-of-the-money options is all extrinsic value. Out-of-the-money options generally do not pose an assignment risk. Why? Let’s revisit our above example but with a different underlying stock price of $110.

   Current Stock Price: $110

   Intrinsic value: 0

If you are long that $120 call and decided to exercise your option, you would buy 100 shares of the underlying stock at $120. Does this make sense? No! You just threw away $10/share. Why not just buy the stock for $10 cheaper in the market for $110?

Since the long party won’t exercise out-of-the-money positions, the short party should therefore have little, if anything, to worry about regarding assignment risk.

Why In-The-Money Options Are Rarely Exercised

But in truth, even in-the-money options are rarely exercised. Why? It makes more financial sense for an investor to simply sell their option contract in the open market rather than convert it to shares. Once you understand why it often doesn’t make sense for a long holder to exercise their contract, it should give you more peace of mind on your short position being assigned. 

In order to understand this, we are going to switch over to the tastyworks platform and look at a few examples, starting with exercising a long call.

Exercising a Long Call

In this example, we are looking at a deep-in-the-money 270 call on Apple (AAPL) which we paid 25 ($2,500) for. Here are the details of the trade:

 AAPL Stock Price : $314.94

 Call Strike Price : 270

 Initial Price Paid for Call : 25 ($2,500)

 Option Market Current Value : 46.8 ($4,680)

 Intrinsic Value : 44.94 ($4,494)

Now right off the bat, we’re going to take notice that the intrinsic value of the option (44.94)  is smaller than the call option’s current market price (46.80). This should be a red flag right away concerning exercisement – keep that in mind. 

So let’s say we decide to exercise our 270 AAPL call option and immediately sell the stock received to lock in our profit. Here are the details of this transaction:

 Exercise 270 Call : Buy 100 shares at $270/share for a cost of $27,000

 Sell Stock : Sell 100 shares of AAPL stock at $314.94/share and receive $31,494

 Net Credit Received (profit) : $31,494 – $27,000 = $4,494

 Net Profit Made: $4,494 – $2,500 (initial debit paid) = $1,994

So the net credit received on this position from exercising our option is $1,994. Not bad, but you could have done better!

Selling a Long Call in the Open Market

Let’s back up a bit here. Remember the current value of the options contract? It is trading at $46.80, the monetary value of which is $4,680. Our net proceeds from exercising the call were only $4,494. See the problem?

We would have netted $186 more ($4,680 – $4,494) had we simply sold the option outright!

 Net Profit From Exercising Call : $1,994

 Net Profit from Selling Call  in the Market : $2,180

So why the discrepancy in selling vs exercising?

Understanding What We Learned

Earlier, we talked upon extrinsic and intrinsic value. Together, these two values comprise an option’s entire premium. 

Remember the intrinsic value of our call option above was 44.94 and the current market price of that option was 46.80? Since an option’s value is either intrinsic or extrinsic, we can determine that the extrinsic value of this option is 46.80-44.94 = 1.86.

We touched earlier on this number above; $186 was the additional premium we would receive if we sell the option in the open market. This number is also always synonymous with an option’s extrinsic value. 

When you exercise an option with extrinsic value, you are forfeting that additional premium. This premium is comprised of implied volatility and future time value, or, the derivatives extrinsic value.

Dividend Risk: Exceptions to the Rule

Not covered yet in this article is something called “dividend risk”. Options traders must monitor their short call positions closely for any dividend being paid out on the underlying. Why? Option contracts don’t receive a dividend. Therefore, investors long in-the-money call options will likely exercise their contract in order to receive the shares, which do indeed pay a dividend. 

If this dividend is greater than an options extrinsic value, short in-the-money call positions will likely be assigned in the days leading up to the ex-dividend date. If you have a tastyworks account, you can always call their trade desk and ask a pro about your chances of being assigned.

When you exercise an option early, you are very likely to forego any additional extrinsic value. It is because of this that short options with a lot of extrinsic value are rarely assigned. 

This doesn’t mean, however, short options are never assigned. If you are short a very deep-in-the-money call or put option in the days leading up to expiration, the extrinsic value will decay and there is a good chance you will be assigned. In fact, it has been estimated that just over 10% of all option contracts will be exercised, and thus assigned, in their lifespan. 

Additionally, if you fail to trade out of your short-in-the-money option before assignment, you will get assignment 99.999% of the time.

Next Lesson

• Dangers of After Hours Options Assignment
• Option Trading for Beginners: The ULTIMATE Guide
• 3 Examples of How Time Changes Option Deltas

Additional Resources

Trading Options: Understanding Assignment | FINRA.org

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Options Assignment

How can i tell when i will be assigned.

You can never tell when you will be assigned. Once you sell an American-style option (put or call), you have the potential for assignment to fulfill your obligation to receive (and pay for) or deliver (and are paid for) shares of stock on any business day. In some circumstances, you may be assigned on a short option position while the underlying shares are halted for trading, or perhaps while they are the subjects of a buyout or takeover.

To ensure fairness in the distribution of equity and index option assignments, OCC utilizes a random procedure to assign exercise notices to clearing member accounts maintained with OCC. The assigned firm must then use an exchange-approved method (usually a random process or the first-in, first-out method) to allocate notices to its accounts that are short the options.

Some generalizations might help you understand likelihood of assignment on a short-option position:

• Option holders only exercise about 7% of options. The percentage hasn't varied much over the years. That does not mean that you can only be assigned on 7% of your short option. It means that, in general, option exercises are not that common.
• The majority of option exercises (and the corresponding assignments) occurs as the option gets closer to expiration. It usually doesn't make sense to exercise an option, which has any time premium over intrinsic value. For most options, that doesn't occur until close to expiration.
• In general terms, an investor is more likely to exercise a put that goes in-the-money than a call that goes in-the-money. Why? Think about the result of an exercise. An investor who exercises a put uses it to sell shares and receive cash. A person exercising a call option uses it to buy shares and must pay cash. Option holders are more likely to exercise options if it means they can receive cash sooner. The opposite is true for calls, where exercise means you have to pay cash sooner.

The bottom line is that you really don't have any sure-fire way to predict when you will be assigned on a short option position. It can happen any day the stock market is open for trading.

Could I be assigned if my covered calls are in-the-money?

If i am short a call option (on a covered write) and i buy back my short call, is it possible for..., if i am short a call option (on a covered write) and i buy back my short call, is it possible for me to be assigned (and the stock position to be called away) that night, i sold short 10 options contracts recently. unfortunately, i was assigned early on each contract..., i sold short 10 options contracts recently. unfortunately, i was assigned early on each contract, one at a time. couldn't all the contracts have been assigned at once, are options automatically assigned when they are in-the-money at expiration is there a way that..., are options automatically assigned when they are in-the-money at expiration is there a way that i can avoid assignment.

OCC encourages all investors to inform their brokerage firm of their exercise intentions for their long options at expiration. While each firm may have their own thresholds, OCC employs an administrative procedure where options that are $.01 in-the-money are exercised unless contrary instructions are provided. Customers and brokers should check with their firm's operations department to determine their company's policies regarding exercise thresholds.

An option holder has the right to exercise their option regardless of the price of the underlying security. It is a good practice for all option holders to express their exercise (or non-exercise) instructions to their broker. Is there a magic number that ensures that option writers will not be assigned? No. Although unlikely, an investor may choose to exercise a slightly out-of-the-money option or choose not to exercise an option that is in-the-money by greater than $.01.

Some investors use the saying, "when in doubt, close them out.” This means that if they buy back any short contracts, they are no longer at risk of assignment.

I wrote a slightly out-of-the-money covered call. The call has since moved in-the-money. Is there...

I wrote a slightly out-of-the-money covered call. the call has since moved in-the-money. is there any way to avoid assignment on that short call, if i buy-to-close a short option position, how can i be sure i will not be assigned.

You will want to first check with your broker to ensure that an assignment has not already occurred.

Because OCC processes closing buy transactions before exercises, there is no possibility of being assigned on positions that were closed during that day's trading hours.

When I sell an option to open, is my only chance of assignment (and being required to fulfill my...

When i sell an option to open, is my only chance of assignment (and being required to fulfill my obligations as the option writer) when the person or entity that bought from me decides to exercise.

No. There are several reasons why this is untrue. First, the buy side of your opening sale could have been a closing purchase by someone who was already short the option. Second, OCC allocates assignments randomly. Anyone short that particular option is at risk of assignment when an option holder decides to exercise. Third, assuming the other side of your trade was an opening purchase, they may sell to close at any time but since you are still short, you are at risk of assignment.

As long as you keep a short option position open, you are at risk of assignment. Assignment risk increases as the option becomes deeper in-the-money and as expiration approaches (the option trades with less time premium). Assignment risk also increases just before the ex-dividend date for short calls and just after the ex-dividend date for short puts.

At expiration, OCC exercises all equity options that are in-the-money by $.01 or more unless the option holder instructs their broker not to exercise or the stock has been removed from OCC’s exercise-by-exception processing.

The exchanges recently halted trading on a stock where I’m short puts. Am I still obligated to...

The exchanges recently halted trading on a stock where i’m short puts. am i still obligated to purchase the security if assigned.

Get the Reddit app

Let's Talk About: Exchange Traded Financial Options -- Options Fundamentals -- The Greeks -- Strategies -- Current Plays and Ideas -- Q&A -- **New Traders**: See the Options Questions Safe Haven weekly thread

Risk of assignment on debit spreads

I've been looking through past threads about options strategies for small accounts. The most suggested strategy is debit spreads. However this doesn't make sense to me and its making my head hurt. You buy a call option, then sell a call option thats a little further out of the money. The best case scenario is that the stock price goes up a good amount, you sell your call option, and your call doesn't get assigned. My question is, what if it does get assigned? As a small account wouldn't you just be fucked. (by small account i mean like 2k).

By continuing, you agree to our User Agreement and acknowledge that you understand the Privacy Policy .

Enter the 6-digit code from your authenticator app

You’ve set up two-factor authentication for this account.

Enter a 6-digit backup code

Create your username and password.

Reddit is anonymous, so your username is what you’ll go by here. Choose wisely—because once you get a name, you can’t change it.

Reset your password

Enter your email address or username and we’ll send you a link to reset your password

Check your inbox

An email with a link to reset your password was sent to the email address associated with your account

Choose a Reddit account to continue

• Sign up for free
• SafetyCulture
• Risk Assessment

How to Perform a Risk Assessment

Identify, analyze, and mitigate potential hazards and the risks associated with them by conducting risk assessments.

What is a Risk Assessment?

A risk assessment is a systematic process used to identify potential hazards and risks in a situation, then analyze what would happen should these hazards take place. As a decision-making tool, risk assessment aims to determine which measures should be implemented to eliminate or control those risks, as well as specify which of them should be prioritized according to their likelihood and impact on the business.

Risk assessment is one of the major components of a risk analysis . Risk analysis is a process with multiple steps that intends to identify and analyze all of the potential risks and issues that are detrimental to the business or enterprise .

Why is it Important?

Risk assessments are essential to identify hazards and risks that may potentially cause harm to workers. Identifying hazards by using the risk assessment process is a key element in ensuring the health and safety of your employees and customers. OSHA requires businesses to conduct risk assessments. According to regulations set by OSHA, assessing hazards or potential risks will determine the personal protective gears and equipment a worker may need for their job.

Risk Analysis Framework

When Do You Perform a Risk Assessment?

Beyond complying with legislative requirements, the purpose of risk assessments is to eliminate operational risks and improve the overall safety of the workplace. It is the employer’s responsibility to perform risk assessments when:

• new processes or steps are introduced in the workflow;
• changes are made to the existing processes,
• equipment, and tools; or new hazards arise.

Risk assessments are also performed by auditors when planning an audit procedure for a company.

Create your own Risk Assessment checklist

Build from scratch or choose from our collection of free, ready-to-download, and customizable templates.

HSE distinguishes three general risk assessment types:

Large Scale Assessments

This refers to risk assessments performed for large scale complex hazard sites such as the nuclear, and oil and gas industry. This type of assessment requires the use of an advanced risk assessment technique called Quantitative Risk Assessment (QRA).

Required specific assessments

This refers to assessments that are required under specific legislation or regulations, such as the handling of hazardous substances (according to COSHH regulations, 1998) and manual handling (according to Manual Handling Operations Regulations, 1992).

General assessments

This type of assessment manages general workplace risks and is required under the management of legal health and safety administrations such as OSHA and HSE.

Here is an example of a completed risk assessment. See more risk assessment examples in various industries.

How to Perform Risk Assessment in 5 Steps

Below are the 5 steps on how to efficiently perform risk assessments :

1. Identify hazards

Survey the workplace and look at what could reasonably be expected to cause harm. Identify common workplace hazards . Check the manufacturer’s or suppliers’ instructions or data sheets for any obvious hazards. Review previous accident and near-miss reports.

2. Evaluate the risks

Risk evaluation helps determine the probability of a risk and the severity of its potential consequences. To evaluate a hazard’s risk, you have to consider how, where, how much, and how long individuals are typically exposed to a potential hazard. Assign a risk rating to your hazards with the help of a risk matrix.

3. Decide on control measures to implement

After assigning a risk rating to an identified hazard, it’s time to come up with effective controls to protect workers, properties, civilians, and/or the environment. Follow the hierarchy of controls in prioritizing implementation of controls.

4. Document your findings

It is important to keep a formal record of risk assessments . Documentation may include a detailed description of the process in assessing the risk, an outline of evaluations, and detailed explanations on how conclusions were made.

5. Review your assessment and update if necessary

Follow up with your assessments and see if your recommended controls have been put in place. If the conditions in which your risk assessment was based change significantly, use your best judgment to determine if a new risk assessment is necessary.

Risk Assessment Tools and Techniques

There are options on the tools and techniques that can be seamlessly incorporated into a business’ process. The four common risk assessment tools are: risk matrix, decision tree, failure modes and effects analysis (FMEA), and bowtie model. Other risk assessment techniques include the what-if analysis, failure tree analysis , Layer of Protection Analysis (LOPA) and Hazard and Operability (HAZOP) analysis.

Improve your GRC management

Simplify risk management and compliance with our centralized platform, designed to integrate and automate processes for optimal governance.

How to use a Risk Matrix?

A risk matrix is often used to measure the level of risk by considering the consequence/ severity and likelihood of injury to a worker after being exposed to a hazard. Two key questions to ask when using a risk matrix should be:

• Consequences: How bad would the most severe injury be if exposed to the hazard?
• Likelihood: How likely is the person to be injured if exposed to the hazard?

The most common types are the 3×3 risk matrix, 4×4 risk matrix, and 5×5 risk matrix .

How to Assess Consequences?

It is common to group the injury severity and consequence into the following four categories:

• Fatality – leads to death
• Major or serious injury – serious damage to health which may be irreversible, requiring medical attention and ongoing treatment
• Minor injury – reversible health damage which may require medical attention but limited ongoing treatment). This is less likely to involve significant time off work.
• Negligible injuries – first aid only with little or no lost time.

How to Assess Likelihood?

It is common to group the likelihood of a hazard causing worker injury into the following four categories:

• Very likely – exposed to hazard continuously.
• Likely – exposed to hazard occasionally.
• Unlikely – could happen but only rarely.
• Highly unlikely – could happen, but probably never will.

We recommend OSHA’s great learning resources in understanding how to assess consequence and likelihood in your risk assessments.

Risk Assessment Training

“Safety has to be everyone’s responsibility… everyone needs to know that they are empowered to speak up if there’s an issue.” – Captain Scott Kelly, at the SafetyCulture Virtual Summit.

A good and effective hazard identification and risk assessment training  should orient new and existing workers on various hazards and risks that they may encounter. It should also be able to easily walk them through safety protocols. With today’s technology like SafetyCulture’s Training feature, organizations can create and deploy more tailored-fit programs based on the needs of their workers.

Risk Assessment Templates

Risk assessments are traditionally completed through checklists, which are inconvenient when reports and action plans are urgently needed. Streamline the process with SafetyCulture, a mobile app solution. Get started by browsing this collection of customizable Risk Assessment templates that you can download for free.

Perform Effective Risk Assessments with SafetyCulture

Why use safetyculture.

SafetyCulture is a mobile-first operations platform adopted across industries such as manufacturing, mining, construction, retail, and hospitality. It’s designed to equip leaders and working teams with the knowledge and tools to do their best work—to the safest and highest standard.

Promote a culture of accountability and transparency within your organization where every member takes ownership of their actions. Align governance practices, enhance risk management protocols, and ensure compliance with legal requirements and internal policies by streamlining and standardizing workflows through a unified platform.

✓ Save time and reduce costs ✓ Stay on top of risks and incidents ✓ Boost productivity and efficiency ✓ Enhance communication and collaboration ✓ Discover improvement opportunities ✓ Make data-driven business decisions

FAQs About Risk Assessment

What is the difference between risk assessment and job safety analysis (jsa).

The key difference between a risk assessment and a JSA is scope. Risk assessments assess safety hazards across the entire workplace and are oftentimes accompanied with a risk matrix to prioritize hazards and controls. Whereas a JSA focuses on job-specific risks and is typically performed for a single task, assessing each step of the job.

What are the 3 main tasks of risk assessment?

The three main tasks of risk assessment include identifying the hazards, assessing the risks that come along with them, and placing control measures to either eliminate them totally or at least minimize their impact on the business and its people.

What are the top 5 operational risk categories?

The five most common categories of operational risks are people risk, process risk, systems risk, external events risk or external fraud, and legal and compliance risk. Operational risks refer to the probability of issues relating to people, processes, or systems negatively impacting the business’s daily operations.

How often should risk assessments be performed?

As stated above, risk assessments are ideally performed when there’s a new process introduced or if there are changes to the existing ones, as well as when there are new equipment or tools for employees to use. Outside of these instances, however, it is recommended that businesses schedule risk assessments at least once a year so that the procedures are updated accordingly.

Who should perform risk assessments?

Risk assessments should be carried out by competent persons who are experienced in assessing hazard injury severity, likelihood, and control measures.

Jairus Andales

Related articles

• Layer of Protection Analysis

Discover the key aspects of and strategies for LOPA to effectively evaluate and enhance safety systems in high-risk industries.

• Find out more

• Dust Hazard Analysis

Explore the essential components of DHA, its significance, and the strategies for ensuring industrial safety.

• Reputational Risk

Learn more about reputational risk, why it’s important that businesses properly manage it, and how to effectively implement risk mitigation strategies.

Related pages

• Hazard Assessment Software
• Process Hazard Analysis Software
• EHS Risk Assessment Software
• Integrated Risk Management Software
• Operational Risk Management Software
• Reputation Management
• Environmental Aspects and Impacts
• Safety Improvement Plan Template
• Contract Risk Assessment Checklist
• Point of Work Risk Assessment Template
• 7 Best Risk Assessment Templates
• 5×5 Risk Matrix Template

An official website of the United States government

Here's how you know

Official websites use .gov A .gov website belongs to an official government organization in the United States.

Secure .gov websites use HTTPS A lock ( Lock Locked padlock ) or https:// means you’ve safely connected to the .gov website. Share sensitive information only on official, secure websites.

News & Events

• Past Events
• USDA Helps Producers Impacted by Hurricane Debby
• RMA Latest Announcements

USDA Expands Insurance Options for Specialty and Organic Growers

  Back to News Releases

WASHINGTON, June 27, 2024 – The U.S. Department of Agriculture (USDA) is expanding crop insurance options for specialty and organic growers beginning with the 2025 crop year. USDA’s Risk Management Agency (RMA) is expanding coverage options by allowing enterprise units by organic farming practice, adding enterprise unit eligibility for several crops, and making additional policy updates. This is the first of several announcements this summer, which will include the expansion of the shellfish policy in the Northeast and new coverage for grape growers in the West and beyond. These expansions and other improvements build on other recent RMA efforts to better serve specialty crop producers and reach a broader group of producers.

“The Risk Management Agency is excited to expand coverage options for specialty and organic growers including the availability of enterprise and optional units for many producers,” said RMA Administrator Marcia Bunger. “Expanding our coverage options gives producers more opportunities to manage their risks. We will continue to build on our work through future announcements later this summer.”

The following changes will be made beginning with the 2025 crop year:

• Expand Enterprise Units (EU) to almonds, apples, avocado (California), citrus (Arizona, California, and Texas), figs, macadamia nuts, pears, prunes, and walnuts.
• Allow non-contiguous parcels of land that qualify for Optional Units (OU) to also qualify for EU.
• Allow EUs by organic farming practice for alfalfa seed, almonds, apples, avocado (California), cabbage, canola, citrus (Arizona, California and Texas), coarse grains, cotton, ELS cotton, dry beans, dry peas, figs, fresh market tomatoes, forage production, grass seed, macadamia nuts, millet, mint, mustard, pears, potatoes (northern, central, and southern), processing tomatoes, prunes, safflower, small grains, sunflower seed, and walnuts.
• Expand OUs by organic practice to all remaining crops where OUs are available, and the organic practice is insurable.
• Walnut Quality Adjustment: Allow sunburned damaged walnuts to be eligible for indemnity payments through quality adjustment.
• Almond Leaf Year: Expand insurance coverage to younger trees by including trees in their fifth leaf year after being set out.
• Processing Bean End of Insurance Period: Extend insurance coverage in Delaware, Maryland , and New Jersey by an additional 16 days.
• Canola: Expand insurance for canola into South Dakota and Michigan.

These revisions come through the Expanding Options for Specialty and Organic Growers Final Rule published today by the Federal Crop Insurance Corporation (FCIC). This Final Rule will update the Common Crop Insurance Policy Basic Provisions, Area Risk Protection Insurance Basic Provisions, and includes changes to individual Crop Provisions. The enterprise unit availability will continue to be rolled out throughout the year with each crop’s contract change date and RMA will continue to evaluate expanding EUs to additional crops.

Additional changes in the June 30 Final Rule include:

• Reduce administrative burdens on growers and the delivery system by removing written agreement requirements on new breaking acreage.
• Reduce coverage penalties on perennial specialty crop producers and producers of intensively managed crops, such as alfalfa, when they move to row crop production. This allows for a seamless transition without losing crop insurance coverage.
• Assignment of Indemnity: Provide flexibility for an indemnity payment to be issued via automated clearing house (ACH) or other electronic means when these methods do not allow for multiple payees.
• Good Farming Practices (GFP): Streamline and shorten the FCIC GFP reconsideration process by closing the administrative file following FCIC’s initial GFP determination.
• Double Cropping and Annual Forage: Clarify a producer must prove insurance history for the annual forage crop and meet the current double cropping requirements to receive a full prevented planting payment.

RMA continues to explore ways to improve risk management tools for specialty crop producers and will be announcing additional program enhancements later this summer. Some of those improvements include:

• Expanding the Shellfish Program to an additional 18 counties in seven states. Additional modifications include allowing insurance on seeds initially purchased smaller than 4 mm, allowing producers to use existing records for coverage in adjacent program counties, and allowing alternative yield procedures.
• Piloting the Fire Insurance Protection – Smoke Index (FIP-SI) crop insurance program for grapes in California for the 2025 crop year. The pilot program is an index-based endorsement to the Actual Production History (APH) Grape policy that provides additional protection against smoke damage and covers the liability between the APH policy’s coverage level and 95%.
• Expanding the Enhanced Coverage Option (ECO) to walnuts and citrus crops and increasing premium support to be consistent with the Supplemental Coverage Option.
• Expanding the Grapevine insurance program to an additional 29 counties in California. Grapevine insurance offers protection against vine losses in the event of several named perils.
• Releasing new Organic Practice Guidelines to producers for the 2025 crop year. These guidelines are to help producers report planted or perennial acreage insured under a certified organic or transitional practice.

More Information

This announcement further advances USDA’s recently announced Specialty Crops Competitiveness Initiative , a Department-wide effort to increase the competitiveness of specialty crops products in foreign markets, enhance domestic marketing, and improve production and processing practices.

Crop insurance is sold and delivered solely through private crop insurance agents. A list of crop insurance agents is available at all USDA Service Centers and online at the RMA Agent Locator . Learn more about crop insurance and the modern farm safety net at rma.usda.gov or by contacting your RMA Regional Office .

USDA touches the lives of all Americans each day in so many positive ways. Under the Biden-Harris administration, USDA is transforming America’s food system with a greater focus on more resilient local and regional food production, fairer markets for all producers, ensuring access to safe, healthy and nutritious food in all communities, building new markets and streams of income for farmers and producers using climate smart food and forestry practices, making historic investments in infrastructure and clean energy capabilities in rural America, and committing to equity across the Department by removing systemic barriers and building a workforce more representative of America. To learn more, visit usda.gov .

                                                                                           #

                                               USDA is an equal opportunity provider, employer and lender.

Risk Management Agency:

1400 Independence Ave. SW Washington, DC 20250

FPAC Press Desk [email protected]