If you’re reading this, then you probably got assigned early on a defined-risk spread. No need to worry, an assignment is a part of the short premium game. Whether you were assigned short stock from a short call or long stock from a short put, we’re here to help clear the air on what you can do if you get assigned and have a long leg.

Article Sections



Assignment & Exercise Review

Assignment vs. Exercise (Obligation vs. Right)

Assignments occur when you are SHORT option. When you are short options you have an obligation.
1 Short Call1 Short Put
Sell 100 shares @ strike price,
resulting in -100 shares short
Buy 100 shares @ strike price,
resulting in +100 shares long

Exercises occur when you are LONG options. When you are long options then you have a right.
1 Long Call1 Long Put
Buy 100 shares @ strike price, resulting in +100 shares long.Sell 100 shares @ strike price, resulting in -100 shares short.

Whether your spread had 100 days until expiration or 3 days to expiration, being short options puts you at risk of assignment at any time before expiration.

It’s natural to gravitate towards exercising your long leg after you get assigned, but you could be leaving money on the table. Instead, you can consider doing a covered stock order so you can get back to trading quicker since exercise request are processed overnight. Plus, by doing a covered stock order, you could take advantage of any extrinsic value left on your long options leg and reduce your overall max loss.

Did we mention that there are no closing commission costs either? You’ll also save yourself $5 from the exercise request by doing a covered stock order instead.

*Please Note: If you were assigned any stock, and your long leg is not in-the-money then performing an exercise request not be in your best interest.

Let’s take a look at two examples of how to set up a covered stock order for:
  1. Assigned short stock from a short call.
  2. Assigned long stock from a short put.


Warning when Legging Out

Legging out can result in an increased max loss

Legging out, or separating your assigned stock position and long option position in separate closing orders may increase your overall max loss from an assignment. If you attempt to leg out, then you may see a warning appear during order entry before clicking Send Order. The warning states: "Excessive risk - Consider an order that will reduce delta exposure. (delta_risk_check_failed)."

Below is an example of an order where the user is trying to sell 5900 shares of SPY without the long put, after being assigned from a put spread.



Covered stock order for a Call assignment

Position: 1-lot BIDU short call vertical spread - short the 185 call strike and long the 195 call strike.

Market price of BIDU stock ≈ $224/share

Assignment: 100 short shares of BIDU @ $185


*One common misconception from being assigned short shares is how can an account buy to cover when the short stock assignment is worth more than the account? Well, when you’re assigned short shares, you actually collect the cash, just like anything else in life you sell and that spread you sold, to begin with.


Setting up a covered stock order on short stock and long call:

  1. Go to Positions tab
  2. Click on the symbol group (if enabled) to view your positions.
  3. Locate the short stock and long call. Click each position, so it is highlighted.
  4. Right-click on the highlighted area and select “CLOSE ORDER.”
  5. The closing order will be sent to the Trade tab and populate into the order ticket. You will notice that the order price will be near your long call strike price. 



Covered stock order for a Put assignment

Position: 2-lot GOOGL short put vertical spread - short the 980 put strike and long the 975 put strike.

Market price of GOOGL stock ≈ $942/share

Assignment: 200 long shares of GOOGL @ $980


Setting up a covered stock order on long stock and long put:

  1. Go to Positions tab
  2. Click on the symbol group (if enabled) to view your positions.
  3. Locate the long stock and long put. Click each position, so it is highlighted.
  4. Right-click on the highlighted area and select “CLOSE ORDER.”
  5. The closing order will be sent to the Trade tab and populate into the order ticket. You will notice that the order price will be near your long put strike price. 


 


Key Points & Takeaways

  • Assignments occur overnight, and the account is assessed a $5/leg assignment fee.
  • Exercise requests to offset assignments are processed overnight and cost $5/leg.
  • When partially assigned on a spread, you can still perform a covered stock order by selecting the stock assignment and long leg and choosing Balanced when closing. To learn more about this, please click here
  • Legging out is when you separate your assigned stock position and long option position in separate closing orders.
  • When lining up a covered stock order, you may disregard the max loss listed during order entry because it does not take into account the original trade. Your risk remains the same as long as you have the long leg.
  • When an account is assigned short stock from a short call the account receives cash for the short sale.
  • When adjusting a covered stock order please be aware of your quantity since each penny ($0.01) equals $1. For example, if you are trying to close 500 long shares and 5 long put then each penny lowered from the strike price equals $5.
  • Despite assignment, the position is still defined risk as long as the account holds the long option.
  • If the long leg is not in-the-money, then a covered stock order can still be executed and potentially reduce the overall max loss. Just be aware if the long leg still has a bid.
  • A defined risk trade is no longer risk defined if the underlying expires in between the strikes since the long leg would expire worthless.
  • Early assignment does not apply to index options, which are European-style options.
  • To learn how to reconcile your position and determine your p/l after an assignment or exercise, please click here.