Assignment, particularly early assignment, is a topic that can give many would-be options traders a pause. It’s also one that can cause quite a panic if you’re unprepared and unsure how to respond, says Danielle Shay of Fivestartrader.com.
I know what it was like when I first started trading options and how afraid I was of the possibility of getting assigned. I also remember all too clearly the various instances of getting assigned and how big of a fright it gave me! This was particularly true when trading with a much smaller account, and I inevitably would end up with a margin call due to assignment. This occurs when you get assigned more stock than your account can handle.
You may say, “Margin call?!” What?! Generally (as long as you are trading a defined risk strategy and/or you exit your shares), you can get out of your shares, and that will remove the margin call. I have never had a situation where I had to deposit money to get out of a margin call, but it can happen if you trade options naked or don’t control your risk.
Now, it all sounds scary, but I can tell you that as long as you understand the basics of how options work, your rights and obligations, and how to manage in the event of an assignment, it is more of an annoyance than anything. And I would say more often than not recently, being assigned has worked out to my benefit. I am still holding 20 shares of Microsoft after I was assigned at $285 (and Microsoft is currently trading at around $344).
Making Money on Assignment
There was also a time when I got assigned Facebook shares, didn’t realize, and went on vacation for a week. I had thought my options trade was expiring out of the money on a Friday, but it ticked up at the very end of the day, and my option expired just slightly in the money. I was leaving for a trip with my family, and I had promised my son I would not be working and would not even open my laptop! A week later, I opened my trading platform to discover that not only had I been assigned but that Facebook shares had skyrocketed, and I accidentally made $1,700 when I was on vacation. That was also during a time frame when I was trading super small and attempting to make $50-100 a day, so $1700 was a huge win for me! So, it’s not always the worst thing that can happen!
All of this being said every assignment is different. It depends on your account size, what other trades you’re holding, whether you want the shares or not, and what your overall strategy is.
Types of Assignments I’ve Experienced
For example, I have dealt with assignments on purpose and accidentally in a variety of ways, such as:
- I have sold puts on purpose just to get assigned stock at a lower price and collect premium (this was a great strategy on DWAC for a while)
- I have bought stock and sold calls against it just to collect premiums without worrying about losing the shares as they were bought for this purpose.
- I have had bullish earnings trades go against me and gotten assigned on the short puts, then waded my way out using the stock to make back the money lost on the trade.
- I have gotten assigned and exercised the other leg of my option to get out using the same risk parameters I used originally (as noted in the video below).
- I was assigned on a Friday lost my protection and ended up with shares I either kept or had to buy my way out of.
So, as you can see, there are many different ways to use assignment (or have it used against you), but the most important thing to understand is
- Having protection for any option you sell will define your risk and protect you by locking in your risk parameters in the instance you experience early assignment
- Not paying attention to your trades and letting them expire in the money on a Friday is an almost surefire way to get assigned
- When half of your options strategy is in the money, and the other half isn’t at a Friday expiration, the short and the long will not cancel each other out, and you can get assigned
- Control your risk from the get-go, pay attention to your trades, and ask for support in your platform if you aren’t sure what to do!
Now, I’m happy to discuss what I’ve been through and how I have managed it, but please keep in mind I can’t give you advice on what you should do with your account.
Learn more about Danielle Shay at Fivestartrader.com.