Assignments occur when you are SHORT option. When you are short options you have an obligation .
Exercises occur when you are LONG options. When you are long options then you have a right .
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.
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? When your account is assigned short shares, you collect the cash from the short sale, which can be used to cover the shares.
Assignments occur overnight, and the account is assessed a fee for assignment (check your broker).
Exercise requests to offset assignments are processed overnight.
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.
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 puts 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 that 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.
An early assignment does not apply to index options, which are European-style options.
) so I haven’t been assigned yet. Great info! Did not even realize assignment carries a fee depending on brokerage.