When Might a Call or Put Option Will be Assigned? | Trade Options Like a DPM Webinars #1

What you have to understand with assignments, this has got to do with calls and/or puts, and we'll dedicate a session of this when I start talking about dividends and other strategies where I'll show you how to take advantage of those situations.

A very good indicator to when a call and a put are going to be assigned is twofold.  Normally, if someone is exercising a call or put, it's because it has a one delta. The reason why they're also exercising it, they want to exercise a call because they want to get long stock because maybe they want to sell that stock long and they can't sell it short. They want to exercise that deeper than one call because they want to take advantage of getting a dividend, which being long the call wouldn't allow them to, but being long the stock they could.

So those might be the reasons why they want to exercise that long call, because obviously when they exercise that long call, now they're putting up more capital because they've got to buy the stock versus the difference of the strike money wise. So there's more margin, more capital needed.

But the reason why they're exercising the call most likely will because they want to capture a dividend, but what you want to look at is over to the put side of the world. What's going on with that put? Does that put have any value? Well, if that put has value, he's not going to exercise that call. He's just going to sell that put. So if the put has no value, chances are you'll be assigned [inaudible 1:27] call.

Now when you're assigned to that call, what's happened to you is you've gone from being short the call at 110, on basically your selling of the call, to being short the stock. So your short stock is now just being taken away from your one stock that you bought. So you're going to be flat and gone. But what you've done at that point is you've captured your premium immediately, and you no longer have the downside risk through 110. So that would be a good scenario for you. If you sold your call for a premium, were long the stock that someone assigned you.

Now on the put side, the same thing is true. If you sold that put and you sold it for a premium and someone assigned you on that put and now you're long stock, well you still have the strategy on because you're long stock and short the call, because we're doing a stock versus an out of money call. In this case, we did the put versus the out of money call. But you sold that put for a premium, so now you've gained that premium, and now you're just caught in the scenario where you've got to put up more margin or capital to buy that stock. You still have the same downside risk you would with the long stock short call, and obviously with the short put long call because you don't have the protection down through your long stock position.

 

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The Admiral explains the two main conditions when someone holding a call option or put option may be assigned the stock. He answers when and why will someone exercise an option. The Admiral is a former CBOE Designated Primary Market Maker (DPM).

This an excerpt from the "Trade Options like a DPM Webinar #1 - Covered/Buy Writes" Q&A session.

Trade Options with The Admiral: HFT Stocks & Options

ABOUT "THE ADMIRAL"

The featured speaker, whom we affectionately call "The Admiral," was a Designated Primary Market Maker (DPM) on the floor of the CBOE for five years. Although we're not using his real name (so don't ask!) suffice it to say that we consider him to be one of the most knowledgeable option traders on the planet. As a floor trader in the '80s and '90s he did the opening options rotation for 5-25 stocks the old-fashioned open outcry way—meaning he opened each option strike price for each of these stocks within the first 30 minutes of trading, both calls and puts.

That meant he had to price more than 500 option strikes, plus as a market maker he traded and kept the markets current. As a DPM, technology brought forth auto-quoting of option series, but pricing of those quotes remained his responsibility. Trading 1 million shares of stocks and 50,000 options contracts was a normal day for him. In 27 years at CBOE, he has traded through the crash of '87, the smaller crash of '90 and the tech bubble in 2000. He has traded three-digit volatility and seen every possible market environment imaginable. So, if you're going to learn options, it might as well be from the very best.

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