Assignment Risk in Options Trading

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Debit Spreads: 3:59
Credit Spreads: 9:19

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In this one, I discuss how assignment affects your option trade. Specifically, the impact of assignment on debit and credit spreads are addressed. Assignment risk seems to be not well understood by many, but it is important to be aware how assignment affects your options position. Is assignment bad? It depends on the option strategy you're using.

When you are assigned, it simply means that your counter party exercised their option. If you sold-to-open that option, you are assigned to fulfill the obligations of that option contract. In the case of calls, this means that you must sell 100 shares at the strike price. In the case of puts, this means you must buy 100 shares at the strike price. When this happens in a debit or credit spread, your long leg will automatically exercise to mitigate your risk. With debit spreads, this results in a gain. With credit spreads, this results in a loss. Because assignment of a credit spread results in a loss, your brokerage will hold aside collateral (money) when you open the credit spread to cover losses in the case of assignment.

Assignment becomes more likely the deeper in the money your short leg is and the closer to expiration it is. If your option expires in the money, it is almost guaranteed that you will be assigned. Dividends can also increase the risk of assignment with call options. This is because a people may want to exercise their calls if the upcoming dividend is larger than the extrinsic value of their calls. If you sold-to-open those calls, then this means you will be assigned.

It is not possible to be assigned when you don't sell-to-open. For example, if you buy a call and then sell it, you are in no way exposed to assignment risk. In fact, it's as if you were never in the trade to begin with (excluding any profit or loss incurred during the life of the trade).

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