Options Assignment – Key Points About Selling Options Part 11

Options Assignment – Key Points About Selling Options Part 11

 

Options Assignment – Key Points About Selling Options (Part 11)

 

From the sell side, what is an assignment? Well, we know when we sold the option, we took on the obligation to execute a transaction and shares of stock at the holders discretion. Selling shares, in the case of a call option, buying shares in the case of a put option, and this happens if the option writer is assigned an exercise notice. The writer has no say in the matter. They can’t express an opinion or a preference to their brokerage firms. Options sellers are the only ones that can be assigned; and similarly here, if we had the same exact option, but now we sold it for a dollar fifty. If assigned on this ‘in the money’ option, the investor will collect or receive cash in the amount of the strike price $8,000 and deliver 100 shares of XYZ.

If it’s an outright position that never had stock to begin with, then there is an unrealized loss and a short stock position. Most likely, in the vast majority of cases, this investor would have already owned the shares from some price below $80. When assigned, accepted the sale of the shares at $80 and when you add in the option premium they effectively sold stock at $81.50. Certainly, that that’s not as good as $84. So, this investor might think well, I gave some money I left some money on the table, but they were comfortable with that when they went into the position to begin with.

Now assignment process, just going to walk this through. In a way as the exercise process starts with the investor and works its way up to the clearing corporation, OCC, that handles all of this. Assignment works the other way, it starts at the foundation of the industry. That is what OCC does. There are clearing member firms of OCC, about a hundred and twenty-five, hundred and thirty different firms that are designated clearing member firms. They all hold positions at OCC. If you have an open short position, either directly or indirectly, OCC knows about it and what they do on expiration day for all those open assignable positions is they run an SEC approved mathematical equation to randomly assign their clearing member firms.

You may have an actual account with one of these firms or most investors have accounts with trading or brokerage firms that do business with clearing member firms, but the chain of communication will start with OCC and go to the clearing member firms and then through one of those either of those depending on where your account is. You’ll be informed of the fact that you were assigned and most of the time that I’ll be by the next trading morning. You should already see the assignment activity in your account. If you haven’t gone through it before and you’re not familiar with it, it’s certainly worth asking your firm how they communicate to you and what you should expect to see on your account the day following expiration.