Am I going to get assigned?
How can I tell if I’m at risk of getting assigned early?
For puts, early assignment is unlikely until the option’s expiration is three weeks or less from the current date, so Jim doesn’t start analyzing short puts for assignment risk until the last three weeks. The risk of early assignment becomes significant if the short put is deep-in-the-money and no longer possesses any time value. As long as time value exists, a put option owner — the person or institution to whom you sold the put — who is intent on exiting the position is better off selling the option on the open market for its full value, which is composed of both intrinsic and time value, rather than exercising the option (therefore assigning it to you) and receiving only the intrinsic value (thus forfeiting the time value).
- For example, assume the current price of an XYZ $60 put is $2.75. With the stock currently trading at $57.70, the intrinsic/exercise value is $2.30 (60-57.70) and the time value would be $0.45 (2.75-2.30). If the put owner would exercise early, the time value would be forfeited. Consequently, it wouldn’t make sense for the put owner to exercise early.
- In contrast, if the current XYZ $60 put price had decayed to only $2.30, then the option value would be composed entirely of intrinsic value with no time value remaining. Early assignment would become much more likely because the put owner would not be forfeiting any time value by exercising the option.
For calls, early assignment risk is slightly more complicated and can occur for two different reasons: (1) lack of time value as is the case with put options; and (2) dividend capture on the day before an ex-dividend date, where the amount of the dividend is larger than the time value remaining in the call option.
- For example, assume the current price of XYZ $60 call is $2.75. With the stock currently trading at $62.40, the intrinsic/exercise value is $2.40 (62.40-60.00). Time value that the put owner would forfeit by early exercise is $0.35 (2.75-2.40). The stock is going ex-dividend tomorrow, and the dividend is worth $0.50. Early exercise after the close of trading today would be likely because the dividend amount of $0.50 is greater than the $0.35 of time value that would be forfeited by exercising the call early.
- In contrast, if the dividend were worth only $0.25, early exercise would be unlikely because the $0.25 dividend would be less than the $0.35 in time value that would be forfeited by exercising early.
See also I got assigned–what do I do now?
Jim explains more about assignment and about the special situation of rolling a put credit spread into a call debit spread here.