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C. Raja Rajeshwari

If I have written an option, how do I anticipate Assignment? — Gauri

If you have written option contracts (short positions), whether a call or a put, you should expect it to be assigned (called upon to make payments) when it is in-the-money, on or before expiration.

This is in the case of options of individual stocks.

However, in the case of index options, since they are European in nature, they can be assigned only on the day of expiration.

In addition, if your option is in-the-money and is approaching expiration, it would be best to square up your short position.

The reason is that on the expiration day the options would be assigned to you.

One well-used strategy for making profits from dividend declaration is either writing deep-in-the-money calls or writing covered calls.

In case of deep-in-the-money call, you can anticipate the option to be assigned to you any day before the ex-date. The call buyer (long positions), would exercise the call and make profits.

On the other hand, in a covered call, you buy the underlying from the cash market and simultaneously selling a deep-in-the-money call.

Since you are holding the share on the ex-dividend date, you will be getting the dividend amount.

However, the risk is that the call may be assigned to you before the stock goes ex-dividend.

You can be assigned, particularly on the evening prior to the ex-date for the dividend - especially if the time value of the call option is less than the dividend amount.

If you have a covered call and want to keep the underlying stock, make sure you know the ex-dividend date of the underlying stock.

As the stocks nears the ex-dividend date, the deep in-the-money call that you have written gets deeper and deeper into the money, making it highly likely to be assigned.

To reiterate, if the call you have written is in-the-money, you might contemplate an early assignment.

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