Managing a book
Managing assignment risk
Assignment is the moment a short option becomes a stock position. Knowing when it can happen, and what to do, is non-negotiable.
is what happens when the long side of your short option exercises. You wake up to a stock position you did not specifically open. New traders panic. Experienced traders check the calendar.
When assignment usually happens
- At expiration: any ITM short option will be assigned at expiration.
- Right before a dividend: short calls on dividend-paying stocks can be assigned the day before ex-dividend if the call is ITM and the dividend exceeds the remaining extrinsic value.
- Almost never otherwise: random early assignment is rare in practice because option holders almost always make more money selling the option than exercising it.
The extrinsic value rule
An option's value is intrinsic plus extrinsic. If extrinsic drops below $0.10 on a short ITM option, the holder makes more by exercising than by selling. That is the threshold to watch.
If your short option has under ten cents of time value left, close it. The risk is no longer worth it.
What to do if you get assigned
- Short call assigned: you delivered shares at the strike. If covered, the shares were yours. If uncovered, you are now short shares and need to either buy them in or roll the position.
- Short put assigned: you bought shares at the strike. The cash to buy them came from your account. You now own the stock.
- Either way, calculate your effective cost basis (strike minus premium collected) and decide whether to sell calls against the new position, hold, or close.
What to do next
Open the portfolio audit. Any short option in the "Needs your attention" bucket is flagged because it is approaching assignment threshold. Read the suggestion, decide, act.