• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Investing Early Assignment Can Be a Gift
Investing

Early Assignment Can Be a Gift

by March 28, 2023
by March 28, 2023 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

Looking at a common situation, suppose that you have written a covered call. You owned 300 shares of YFS (Your Favorite Stock Inc.), watched it rally, and finally decided that it’s time to sell the shares because you believe they are fully priced at $41 per share.

 

Instead of selling the shares outright, you decided to milk this trade for additional profits and wrote three YFS March 40 Calls, collecting a premium of $2.50. If the stock is above $40 when expiration arrives, you will sell the shares at $40. Adding the option premium, your net is $42.50 instead of $41. Sure, there’s some downside risk prior to expiration, but you decide to accept that risk.

 

All goes well, the stock rallies further and when it’s trading at $44, you are surprised to be assigned an exercise notice because it’s one week before expiration. There was no reason for the option owner to exercise and the stock did not go ex-dividend. Nevertheless, you sold your stock, earned your profit and even collected the cash one week early. This is all good.

 

In most cases that’s the end of the story. However, on this occasion you learn the importance of not exercising an option earlier than necessary. On Monday and Tuesday of expiration week, overseas markets tumbled and the U.S. market followed suit. On top of that, YFS issues some minor news that, under ordinary market conditions, would have been shrugged off.  However, with the nervous market and a substantial two-day decline, YFS fell out of bed. When the market opened Wednesday morning, it was trading south of $37 per share.

 

If you had not been assigned early, you would own stock and have no chance to sell at $40. So give a big “thank you” to the person who made the terrible decision to exercise.

 

Think of it this way — it’s exactly the same as if the person who exercised your calls said to you:

 

“Here is a FREE put option. I’m taking your stock now and in its place you now own three March 40 YFS put options. If the stock trades below $40 next week, you will have the right to sell those shares at $40. In reality you already sold the shares, but because most stockholders were not assigned an exercise notice, I’ve given you a special gift: three put options. I did this because I am certain these puts are worthless, but they are yours with my compliments.”

 

Of course, the exerciser does not truly think that way or else he/she would have never exercised early. This time you were saved from taking a loss. If YFS dips low enough that you want to repurchase the shares, you are in position to do so. If you still owned the original shares, you would not have the ready cash to make that choice.

 

Being assigned on a call option is the same as being handed a free put. Being assigned early on a put option is equivalent to being handed a free call. These “imaginary, free” options have the same strike and expiration date as the real options on which you were assigned.

 

Don’t be unhappy when assigned. It can be a rare gift.

Like this article? Visit our Options Education Center and Options Trading Blog for more.

 

Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

Related articles

Everything You Need To Know About Options Assignment Risk

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

 

You Might Also Like
  • Should you buy or sell the Dax index amid German industrial production rebounding?
  • WWE stock jumped 20% on Friday: find out more
  • Amazon to lay off a lot more employees than initially planned
  • Signet stock up 20%: ‘we’re prepared for a strong holiday season’
Share
0
FacebookTwitterPinterestWhatsapp

previous post
Disney World strikes deal with union workers to raise the minimum wage to $18 an hour
next post
Sector Spotlight: Stocks Entering Year’s Strongest Month

You may also like

New Grindr stock ticker, GRND, after merger with Tiga is...

November 24, 2022

World Cup shock dumps Argentina token

November 24, 2022

Bitcoin soars over 5% on better-than-expected CPI

December 13, 2022

What made Designer Brands stock tank 25% on Thursday?

December 1, 2022

What made Logitech shares lose 20% on Thursday?

January 12, 2023

Netflix stock is the ‘best recession play’ for 2023: Analyst

December 12, 2022

Peloton stock price is surging: is this a dead cat...

December 2, 2022

Long Put Option Strategy

October 11, 2023

L3Harris buying Aerojet is ‘not what I wanted to see’:...

December 19, 2022

BREAKING: US inflation at 6.5%, what does it mean for...

January 12, 2023

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Krispy Kreme stock plunges after doughnut chain pauses McDonald’s rollout, pulls outlook

      May 8, 2025
    • Don’t Buy Robinhood Stock… Until You See This Chart Setup

      May 8, 2025
    • UnitedHealthcare sued by shareholders over reaction to CEO’s killing

      May 8, 2025
    • The Unpredictable Stock Market: How to Make Sense of It

      May 8, 2025
    • AMD CEO calls China a ‘large opportunity’ and warns against strict U.S. chip controls

      May 7, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,630 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,339 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,320 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,302 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,186 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,066)
    • Investing (538)
    • Stock (2,530)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Krispy Kreme stock plunges after doughnut chain pauses McDonald’s rollout,...

      May 8, 2025
    • Don’t Buy Robinhood Stock… Until You See This Chart Setup

      May 8, 2025
    • UnitedHealthcare sued by shareholders over reaction to CEO’s killing

      May 8, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,066)
    • Investing (538)
    • Stock (2,530)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Cramer double downs on Disney shares...

    November 29, 2022

    Leon Cooperman shares market outlook following...

    January 6, 2023

    Here’s what protests at Foxconn plant...

    November 25, 2022
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here