Managing Assignment Risk

Understanding Assignment

Assignment occurs when an option buyer exercises their right, and you (the seller) must fulfill your obligation:

• Put assignment: You buy 100 shares at the strike price
• Call assignment: You sell 100 shares at the strike price

When Does Assignment Happen?

Assignment is most likely when your option is:

1. In-the-money (ITM) at expiration
2. Deep ITM before expiration
3. ITM just before an ex-dividend date (for calls)

Situation	Assignment Likelihood
Option OTM	0%
Option ATM at expiration	~50%
Option ITM at expiration	~100%
Deep ITM before expiration	Variable

Early Assignment

Early assignment can happen at any time, but is more common when:

For Puts:

• Option is very deep ITM
• Near expiration with no time value
• Stock has dropped significantly

For Calls:

• Stock is trading above strike price
• Ex-dividend date approaching
• Time value is less than dividend amount

Preventing Unwanted Assignment

If you want to avoid assignment, you have several options:

1. Buy to close - simply buy back the option
2. Roll out - close current position, open later expiration
3. Roll up/down - move strike further OTM
4. Let it expire - only if you're sure it will be OTM

Rolling Strategy

Rolling is closing your current position and opening a new one in a single trade:

Roll Out (Same Strike, Later Date):

• Used when you want more time
• Collects additional premium
• Delays potential assignment

Roll Up/Out (Higher Strike, Later Date) - for calls:

• Gives stock more room to run
• Usually costs money (debit) or breaks even
• Preserves more upside potential

Roll Down/Out (Lower Strike, Later Date) - for puts:

• Reduces assignment risk
• May collect credit or cost money
• Lowers your potential purchase price

When to Accept Assignment

Assignment isn't always bad. Accept it when:

For Puts	For Calls
You want to own the stock	You're happy with the profit
Strike is below your target price	Stock is overvalued at strike
You're ready to sell calls	You want to free up capital
Premium received was good	Better opportunities elsewhere

Handling Assignment

When assigned on a put:

1. Review your new position size
2. Check if you're overweighted in the sector
3. Set up your covered call plan
4. Update your cost basis tracking

When assigned on a call:

1. Calculate your total return
2. Record the trade for taxes
3. Move cash to your put-selling pool
4. Look for your next put opportunity

Assignment and Taxes

Assignment has tax implications:

• Put assignment: Your cost basis = strike price - premium received
• Call assignment: Your sale price = strike price + premium received
• Track holding periods for long vs. short-term treatment

The Dividend Trap

For covered calls, beware of early assignment before ex-dividend:

Example:

• Stock at $52
• You sold $50 call
• Dividend of $0.50 tomorrow
• Call has $0.30 extrinsic value

Risk: Call buyer may exercise early to capture the $0.50 dividend since it's worth more than the $0.30 time value remaining.

Prevention: Roll or close calls before ex-dividend when extrinsic value is less than the dividend.

Quick Reference: Assignment Decisions

Scenario	Recommended Action
Slightly ITM, 2+ weeks to expiration	Wait, may come back OTM
Deep ITM, any time	Consider rolling
ITM at expiration	Accept assignment
Call ITM before ex-dividend	Roll or close

In the next lesson, we'll dive deeper into rolling options - the key skill for managing your wheel positions over time.