How to Avoid Assignment in Options Trading: Practical Tips for Investors and Traders

In this article, Koen Hoorelbeke, an Investment and Options Strategist, provides insights into the mechanics of options assignment and offers practical tips for investors and traders to avoid unwanted assignment. This piece is part of a four-part mini-series aimed at enhancing understanding of options trading.

Understanding Assignment

Assignment occurs when the buyer of an option exercises their right, which obligates the seller to buy or deliver shares. The article emphasizes that assignment is predictable and often comes with warning signs if one knows what to look for.

Key Concepts

Extrinsic Value

Extrinsic value, or time value, is a crucial indicator of assignment risk. It represents the portion of an option's price that reflects the time left until expiration and market volatility. The article suggests that as long as the extrinsic value is above €0.20, early exercise is unlikely. However, if it drops below €0.10, especially for in-the-money options, the risk of assignment increases significantly.

In-the-Money Options

Being in-the-money does not automatically mean assignment is imminent. The article illustrates that traders can manage their positions effectively, such as holding a long call alongside a short put at the same strike price, which creates a synthetic long stock position. This balance mitigates the risk of assignment.

Timing and Market Conditions

Most early assignments occur near expiration, particularly on Fridays. The article advises traders to monitor their short options closely as they approach expiration and to be particularly vigilant around dividend dates, as this can increase the likelihood of assignment for call options.

Practical Examples

The article provides several scenarios to illustrate how to manage assignment risk:

• Covered Call on a Dividend Stock: If a call option is sold at €48 and the stock is at €49.20 the day before the ex-dividend date, the risk of assignment is high due to the dividend payout.
• Cash-Secured Put Nearing Expiry: If a put option is sold at €22 and the stock is trading at €17.80 with minimal extrinsic value, the trader should consider closing or rolling the position to avoid assignment.
• Iron Condor with Breached Put Side: If a short put is in the money, the trader should close the short leg before expiration to avoid owning the stock.

Final Thoughts

The article concludes that avoiding assignment is often about timing and proactive management. By understanding the warning signs and market conditions, traders can take control of their options strategies, whether they wish to avoid assignment or accept it on their own terms.

Related Articles

For further reading, the article references additional parts of the mini-series on options assignment, including how to use assignment to one’s advantage and a cheat sheet for managing options effectively.