An assignment of option takes place when a short stock option position, opened by an options writer, is assigned for execution. The short option position vanishes and the options writer puts up for sale the underlying stock if call options were written or purchases the underlying stock if put options were written. Generally, assignment occurs arbitrarily for short in the money options prior to expiration albeit assignment is obligatory for short in the money options for the period of options expiration in what is called an “automatic assignment”.
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A number of things can happen during options trading that should be carefully addressed. Some of the most important issues discussed as under:
Assignment of Options before Expiration:
Assignment of options before expiration is also named as “early assignment”. It is totally arbitrary and may occur on condition that a person hold short in the money options. Although there are a number of sweeping statements over the type of options that usually gets assigned, there is no certain means to determine if you would be the next candidate for an assignment. This results in ambiguity when shorting in the money options in options trading. This is the reason of requiring options margin when writing options because it makes sure that you have enough funds to fulfill assignment needs.
Overview of an Assignment of Option:
- The closer to ex-dividend date, the more the chances of assignment for short in the money call options.
- The closer to expiration, the more the chances of assignment.
- The additional in the money the short options are, the more probable they are to be assigned.
- Approximately 12 percent of all options get exercised which means approximately 12 percent of all short options get assigned. Therefore, an assignment of option is very uncommon.
- Since put options are more exercised than call options, therefore, short in the money put options are more likely to be assigned than short in the money call options.
Assignment of Options during Expiration:
Options Clearing Corporation automatically assigns all short stock options, which are one cent or more in the money during expiration. This process is called an Automatic Assignment. Although different brokers may have different thresholds, it hardly ever varies from the threshold of the Options Clearing Corporation.
An assignment of options in options trading does not occur only when it is written directly bare options. It can also occur to options that are written as part of an options trading strategy. This is the reason why all traders of options that use complex options approaches, require taking all possible assignment of option situations into deliberation when carrying out their options trading approaches to avoid an unpredictable margin call.
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