Q & A. Is Avoiding Assignment Worth the Effort?

Hi Mark:  

I am still an option rookie and have been doing mostly virtual trades and have recently started live trading.   I am somewhat confused about an option being assigned, therefore,  I have tried to avoid being assigned.  

Last month was the first time I had a live option trade at expiration, when the broker sent out their generic letter about assignment and making sure you have enough funds to cover if assigned.  The trade [an option I had sold] was slightly in the money.    But because my account is somewhat limited I closed the trade.   Including the commission, I did have a small loss. I would have made a small profit if I had let it expire worthless.
   

I am not sure of how this should work.  I do understand that if the put option is in the money at expiration and I am assigned,  I now own the stock and can sell it at the current market value.  But somehow I am not comfortable with that just yet, because I don't quite understand all the ramifications.  How can I be negatively affected in this situation?

Hello

Most of the time an assignment is nothing more than a minor inconvenience, and nothing that should concern you.

First, it's my belief (my personal comfort zone – you must define your own) that trying to collect the last few nickels from an option trade is far too risky for me.  In your position, I probably would have covered before Friday's expiration – but that does depend on the option price and the perceived risk.

Second, you write that you are uncomfortable with being assigned an exercise notice – and you shouldn't be. [NOTE: This is a discussion about being assigned at expiration.  That's an entirely different situation than being assigned early.] 

When assigned, you must hold the stock until Monday because you are not officially assigned until Saturday and are not informed of the assignment before Sunday (online, if your brokers offers that service) or Monday morning before the market opens.  The stock price may be far different when the market opens Monday.  Why would you want to take that risk?  And to make it just a bit worse, you own stock for three days and must pay interest on the cash used to buy the shares.

To prevent being assigned, buy the options you sold earlier.  One word of warning that does not apply to the case you just described:  if you do receive an assignment notice before you buy back those options, it's too late.  The assignment cannot be undone.


Ramifications?
 

To buy shares, you must have sufficient cash, or assets, in your account.  If you don't, you will receive a margin call.  As you stated, you can eliminate that margin call by simply selling the shares.  But, that's not the 'right' way to meet a margin call.  The broker may let you get away with meeting a margin call by eliminating the offending position, but in reality, you are supposed to meet the call by depositing cash, or other assets, such as stock, into your account. 

There are no real 'ramifications' other than the risk I mentioned earlier.  But, it's really a good idea not to get margin calls unless you have the ability to immediately wire funds to your broker.  But, it's really best to avoid margin calls. Period.  Thus, your decision to repurchase the short put option was a good one. 

But – the timing of that purchase is up to you.  The form letter from from the broker was meant to alert you to the situation, not to tell you to buy in your shorts NOW.

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