short call assignment risk

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Understanding assignment risk in Level 3 and 4 options strategies

E*TRADE from Morgan Stanley

With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned , either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a short position can be assigned to you at any time. On this page, we’ll run through the results and possible responses for various scenarios where a trader may be left with a short position following an assignment.

Before we look at specifics, here’s an important note about risk related to out-of-the-money options: Normally, you would not receive an assignment on an option that expires out of the money. However, even if a short position appears to be out of the money, it might still be assigned to you if the stock were to move against you just prior to expiration or in extended aftermarket or weekend trading hours. The only way to eliminate this risk is to buy-to-close the short option.

Short (naked) calls

Credit call spreads

Credit put spreads, debit call spreads, debit put spreads.

When all legs are in-the-money or all are out-of-the-money at expiration

Another important note : In any case where you close out an options position, the standard contract fee (commission) will be charged unless the trade qualifies for the E*TRADE Dime Buyback Program . There is no contract fee or commission when an option is assigned to you.

Short (naked) call

If you experience an early assignment.

An early assignment is most likely to happen if the call option is deep in the money and the stock’s ex-dividend date is close to the option expiration date.

If your account does not hold the shares needed to cover the obligation, an early assignment would create a short stock position in your account. This may incur borrowing fees and make you responsible for any dividend payments.

Also note that if you hold a short call on a stock that has a dividend payment coming in the near future, you may be responsible for paying the dividend even if you close the position before it expires.

An early assignment generally happens when the put option is deep in the money and the underlying stock does not have an ex-dividend date between the current time and the expiration of the option.

Short call + long call

(The same principles apply to both two-leg and four-leg strategies)

This would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short and simultaneously sell the long leg of the spread.

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date, because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

Short put + long put

Early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

However, the long put still functions to cover the position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.

Here's a call example

Let’s say that you’re short a 100 call and long a 110 call on XYZ stock; both legs are in-the-money.
You receive an assignment notification on your short 100 call, meaning you sell 100 shares of XYZ stock at 100. Now, you have $10,000 in short stock proceeds, your account is short 100 shares of stock, and you still hold the long 110 call.
Exercise your long 110 call, which would cover the short stock position in your account.
Or, buy 100 shares of XYZ stock (to cover your short stock position) and sell to close the long 110 call.

Here's a put example:

Let’s say that you’re short a 105 put and long a 95 put on XYZ stock; the short leg is in-the-money.
You receive an assignment notification on your short 105 put, meaning you buy 100 shares of XYZ stock at 105. Now, your account has been debited $10,500 for the stock purchase, you hold 100 shares of stock, and you still hold the long 95 put.
The debit in your account may be subject to margin charges or even a Fed call, but your risk profile has not changed.
You can sell to close 100 shares of stock and sell to close the long 95 put.

Long call + short call

Debit spreads have the same early assignment risk as credit spreads only if the short leg is in-the-money.

An early assignment would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short share position and simultaneously sell the remaining long leg of the spread.

Long put + short put

An early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.

All spreads that have a short leg

(when all legs are in-the-money or all are out-of-the-money)

Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.

However, the long put still functions to cover the long stock position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.

Everything You Need to Know About Options Assignment Risk

By Pat Crawley

The fear of being assigned early on a short option position is enough to cripple many would-be options traders into sticking by their tried-and-true habit of simply buying puts or calls. After all, theoretically, the counterparty to your short options trade could exercise the option at any time, potentially triggering a Margin Call on your account if you’re undercapitalized.

But in this article, we're going to show you why early assignment is a vastly overblown fear, why it's not the end of the world, and what to do if it does occur.

What is Assignment in Options Trading?

Do you remember reading beginner options books or articles that said, "an option gives the buyer the right, but not the obligation, to buy/sell a stock at a specified price and date?" Well, it's accurate, but only for the buy side of the contract.

The seller of an option is actually obligated to buy or sell should the buyer choose to exercise their contract. So when options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

Let's say you sold a call option on a stock with a strike price of $50, which you held until expiration. At expiration, the stock trades at $55, meaning it's automatically exercised by the buyer. In this case, you are forced to sell the buyer 100 shares at $50 per share.

So when selling options, assignment is when you, the lucky seller of an options contract, get chosen to make good on your obligation to buy or sell the underlying asset.

What is Early Assignment in Options Trading?

Early assignment is when the buyer of an options contract that you're short decides to exercise the option before the expiration and begins the assignment process.

Many beginning traders count early assignments as one of their biggest trading fears. Many traders' fear of early assignment stems from their lack of understanding of the process. Still, it's typically not something to worry about, and we'll show you why in this article. But first, let's look at an example of how the process works.

For instance, say we collect $1 in premium to short a 30-day put option on XYZ with a strike price of $45 while the underlying is trading at $50. Fast forward, and it's the morning of expiration day. Options will expire at the close of trading in a few hours. The underlying stock is hovering around $44.85. Our plan pretty much worked as planned until, for some reason, the holder of the option exercises the option. We're confused and don't know what's going on.

It works exactly the same way as ordinary options settlement . You fulfill your end of the bargain. As the seller of a put option, you sold the right to sell XYZ at $45. The option buyer exercised that right and sold his shares to you at $45 per share.

And now, let's break down what happened in this transaction:

You collected $1 in premium when opening the contract
The buyer of the option exercises his right to sell at $45 per share.
You’re now long 100 shares of XYZ that you paid $45 for, and you sell them at the market price of $44.80 per share, realizing a $0.20 per share loss.
Your profit on the transaction is $0.80 because you pocketed $1 from the initial sale of the option but lost $0.20 from selling the 100 shares from assignment at a loss.

Why Early Assignment is Nothing to Fear

Many beginning traders count early assignments as one of their biggest trading fears; on some level, it makes sense. As the seller of an option, you're accepting the burden of a legitimate obligation to your counterparty in exchange for a premium. You're giving up control, and the early assignment shoe can, on paper, drop at any time.

Exercising Options Early Burns Money

People rarely exercise options early because it simply doesn't make financial sense. By exercising an option, you're only capturing the option's intrinsic value and entirely forfeiting the extrinsic value to the option seller. There's seldom a reason to do this.

Let's put ourselves in the buyer's shoes. For instance, we pay $5 for a 30-day call with a strike price of $100 while the underlying is trading at $102. The call has $2 in intrinsic value, meaning our call is in-the-money by $2, which would be our profit if the option expired today.

The other $3 of the option price is extrinsic value. This is the value of time, volatility, and convexity. By exercising early, the buyer of an option is burning that $3 of extrinsic value just to lock in the $2 profit.

A much better alternative would be to sell the option and go and buy 100 shares of the stock in the open market.

Viewed in this light, an option seller can’t be blamed for looking at early assignment as a good thing, as they get to lock in their premium as profit.

Your Risk Doesn’t Change

One of the biggest worries about early assignment is that being assigned will somehow open the trader up to additional risk. For instance, if you’re assigned on a short call position, you’ll end up holding a short position in the underlying stock.

However, let me prove that the maximum risk in your positions stays the same due to early assignment.

How Early Assignment Doesn’t Change Your Position’s Maximum Risk

Perhaps you collect $2.00 in premium for shorting an ABC $50/$55 bear call spread. In other words, we're short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50.

Before considering early assignment, let's determine our maximum risk on this call spread. The maximum risk for a bear call spread is the difference between the strike minus the net credit you receive. In this case, the difference between the strikes is $5, and we collect a net credit of $2, making our maximum risk on the position $3 or $300.

You wake up one morning with the underlying trading at $58 to find that the counterparty of your short $50 call has exercised its option, giving them the right to buy the underlying stock at $50 per share.

You'd end up short due to being forced to sell the buyer shares at $50. So you're short 100 shares of ABC with a cost basis of $50 per share. On that position, your P&L is -$800, the P&L on a $55 long call is +$250, on account of you paying $0.50, and the call being $3.00 in-the-money. And finally, because the option holder exercised early, you get to keep the entire credit you collected to sell the $50 call, so you've collected +$250.

So your P&L is $300. You've reached your max loss. Let's get extreme here. Suppose the price of the underlying runs to $100. Here are the P&Ls for each leg of the trade:

Short stock: -$5,000
Long call: +$4,450
Net credit received from exercised short option: +$250
5,000 - (4,450 + 250) = $300

While dealing with early assignments might be a hassle, it doesn’t open a trader up to additional risk they didn’t sign up for.

Margin Calls Usually Aren’t The End of the World

Getting a margin call due to early assignment isn't the end of the world. Believe it or not, stock brokerages have been around for a long time. They have seen early assignments many times before, and they have protocols for it.

Think about it intuitively, your broker allowed you to open the short option position knowing that the capital in your account could not cover an early assignment. Still, they let you make the trade anyways.

So what happens when you get an early assignment that you can’t cover? Your broker issues you a margin call. Once you’re in violation of their margin rules, they pretty much have carte blanche to handle the situation as they wish, including liquidating the assigned stock position at their will.

However, most brokers will give you some time to react to the situation and either decide to deposit more capital, liquidate the position on your own, or exercise offsetting options to fulfill the margin call in the case of an option spread.

Even though a margin call isn't fun, remember that the overall risk of your position doesn't change due to an early assignment, and it's typically not a momentous event to deal with. You probably just have to liquidate the trade.

When Early Assignment Might Occur?

Dividend Capture

One of the few times it might make sense for a trader to exercise an option early is when he's holding a call that is deep in-the-money, and there's an upcoming ex-dividend date.

Because deep ITM calls have very little extrinsic value (because their deltas are so high), any negligible extrinsic value is often outweighed by the value of an upcoming dividend payment , so it makes sense to exercise and collect the dividend.

Deep In-The-Money Options Near Expiration

While it's important to emphasize that the risk of early assignment is very low in most cases, the likelihood does rise when you're dealing with options with very little extrinsic value, like deep-in-the-money options. Although, even in those cases, the probabilities are pretty low.

However, an options trader that is trading to exploit market anomalies like the volatility risk premium, in which implied volatility tends to be overpriced, shouldn't even be trading deep-in-the-money options anyhow. Profitable option sellers tend to sell options with very little intrinsic value and tons of extrinsic value.

Bottom Line

Don't let the fear of early assignment discourage you from selling options. Far worse things when shorting options! While it's true that early assignment can occur, it's typically not a big deal. Related articles

Can Options Assignment Cause Margin Call?
Assignment Risks To Avoid
The Right To Exercise An Option?
Options Expiration: 6 Things To Know
Early Exercise: Call Options
Expiration Surprises To Avoid
Assignment And Exercise: The Mental Block
Should You Close Short Options On Expiration Friday?
Fear Of Options Assignment
Day Before Expiration Trading
Accurate Expiration Counting

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Short Call Options Strategy (Awesome Guide w/ Examples)

Options trading 101 - the ultimate beginners guide to options.

Download The 12,000 Word Guide

Today we’re going to take a detailed look at the short call options strategy.

This is not a strategy that is recommended for beginners due to the unlimited loss potential, so don’t try this strategy until you have at least 12 months experience.

Let’s get started.

What Are Short Call Options?

Maximum loss, maximum gain, breakeven price, payoff diagram, risk of early assignment.

Short call options are also called naked calls due to the fact they are not covered by a position in the underlying stock.

Traders looking at this strategy would be mildly bearish, although it can be trading as an aggressive bearish position by bring the short strike closer to the stock price.

With a short call option, the trader is looking for the stock to stay flat or decline.

The trade can still profit in the case of the stock rising slightly, but that is not the preferred scenario as it could put the trade under pressure and see the trader sitting on unrealized losses and therefore faced with the difficult decision to cut losses or stay in a losing trade.

After placing a short call option trade, the trader has an obligation to sell the stock to the buyer of the option at the agreed price on or before the expiration date.

This would only occur if the call option was assigned by the buyer.

Assignment can occur at any time but is more likely when the stock price is above the strike price and there is little time value left in the call options.

If the stock price stays below the short strike for the duration of the trade, the call option will expire worthless and the option position will be removed from the seller’s account.

While this article is only focused on naked calls, selling a short call is common for investors who already own the stock and are looking to generate additional income. This strategy is known as a covered call .

The maximum loss on the trade is theoretically unlimited as the stock can continue moving higher with no limit.

For this reason, it is not a recommended strategy for beginners.

Some traders will set a stop loss at 1.5 to 2 times the premium received.

However, I’ve seen many cases where overbought stocks have rocketed higher following a positive news announcement.

Stop losses do little help in that situation as the stock blows right through the stop loss level.

The maximum gain for the strategy is limited to the premium received for selling the call option.

When calculating the percentage return, traders can take the premium received divided by the margin requirement.

This can be a little deceptive because the potential loss can be much higher than the margin requirement.

Also, if the stock moves higher, the margin requirements will increase as the position comes under pressure.

The breakeven price for a short call option strategy is the short call strike plus the premium received.

For example, if a stock is trading at $120 and the trader sells a $125 call option for a premium of $2.50, the breakeven price would be $127.50.

Keep in mind that is the breakeven price at expiry.

The trade could be in a loss position at much lower levels if the stock moves higher early in the trade.

Short calls have a similar shaped payoff diagram to a long put.

Profits are flat below the strike price with a breakeven price equal to the strike price plus the premium.

Above the breakeven price, losses accrue on a one to one basis with a move higher in the stock price.

The T+0 line in the payoff diagram below show that losses can occur at prices lower than the breakeven price on interim dates.

There is always a risk of early assignment when having a short option position in an individual stock or ETF.

You can mitigate this risk by trading Index options , but they are more expensive.

Usually early assignment only occurs on call options when there is an upcoming dividend payment and / or if there is very little time premium left.

Traders will exercise the call in order to take ownership of the stock before the ex-date and receive the dividend.

Short calls have negative delta, negative gamma, negative vega and positive theta.

As a negative delta trade, the ideal scenario for the trader is a drop in the stock price. Delta is going to be the main driver of the trade as far as the greeks are concerned.

The closer the trade is placed to the stock price, the higher the negative delta will be.

Aggressively bearish traders would place the short strike closer to the money which would provide a larger negative delta exposure and generate a higher option premium.

Less bearish traders might place the trade further away from the stock price giving them less delta exposure but also reducing the amount of premium received.

In the PG example above, the trade has a delta of -25 which is an equivalent exposure to being short 25 shares.

The delta will change as the trade progress due changes in the stock price and the other greeks.

Short calls are negative gamma which means the delta exposure will become more negative as the stock rises.

This has the effect of losses starting to “snowball” as the stock rises.

For this reason, it’s important to cut losses or hedge earlier rather than later.

The PG short call example has gamma of -3 meaning that for every $1 change in the underlying stock price, the delta will change by 3.

Vega is the greek that measures a position’s exposure to changes in implied volatility . If a position has negative vega overall, it will benefit from falling volatility.

Negative vega on a short call strategy means the position will benefit from a decrease in implied volatility after placing the trade.

If the stock stays flat and implied volatility drops, the trade will start to be in a profitable position.

The PG short call strategy has vega of -14 meaning that for every 1% change in implied volatility, the P&L on the position will change by +/- $14.

Short call options are a positive theta trade meaning that they will benefit from time passing.

This is also known as time decay .

The PG trade has theta of 4 meaning that the trade will make $4 per day from time decay with all else being equal.

It goes without saying that as a bearish trade, there is a risk that the price of the underlying will rise causing an unrealized loss, or a realized loss if we close the trade.

Some other risks associated with short call options:

ASSIGNMENT RISK

We talked about this already so won’t go into to much detail here and while this doesn’t happen often it can theoretically happen at any point during the trade. The risk is most acute when a stock trades ex-dividend.

If the stock is trading well below the sold call, the risk of assignment is very low. E.g. a trader would generally not exercise his right to buy PG at $145 when PG is trading at $138 purely to receive a $0.50 dividend.

The risk is highest if the stock is trading ex-dividend and the short call is in the money.

One way to avoid assignment risk is to trade stocks that don’t pay dividends, or trade indexes that are European style and cannot be exercised early.

However, this should not be the primary factor when determining which underlying instrument to trade.

Otherwise, think about closing your short call option before the ex-dividend date if it is in-the-money.

EXPIRATION RISK

Leading into expiration, if the stock is trading just above or just below the short call, the trader has expiration risk.

The risk here is that the trader might get assigned and then the stock makes an adverse movement before he has had a chance to cover the assignment.

In this case, the best way to avoid this risk is to simply close out the spread before expiry.

While it might be tempting to hold the spread and hope that the stock drops and stays below the short call, the risks are high that things end badly.

Sure, the trader might get lucky, but do you really want to expose your account to those risks?

VOLATILITY RISK

As mentioned on the section on the greeks, this is a negative vega strategy meaning the position benefits from a fall in implied volatility .

If volatility rises after trade initiation, the position will likely suffer losses.

Let’s look at an example trade:

CVX SHORT CALL

Date: July 7, 2020

Current Price: $86.31

Trade Set Up:

Sell 1 CVX Aug 21st, 95 call @ $1.51

Premium: $151 Net credit

Capital (Margin) Requirement: $864

Return Potential: 17.48%

Annualized Return Potential: 141.78%

The trade was never under pressure and expired for a full profit.

Let’s also look at an example of a losing trade to illustrate what can go wrong.

UNH SHORT CALL

Date: February 27, 2020

Current Price: $256.76

Sell 1 UNH Apr 17 th , 290 call @ $3.06

Premium: $306 Net credit

Capital Requirement: $2,568

Return Potential: 11.92%

Annualized Return Potential: 86.99%

This trade did not work at all and within a few days the trade was down $950. A good example of what can go wrong.

The margin requirement had also blown out to $5,495 which is an important consideration to keep in mind when trading short calls.

Short call options are a risky strategy due to the unlimited loss potential, so they are not recommended for beginners.

Traders employing this strategy are looking for the stock to decline, stay flat, or not rise by too much.

The profit is limited to the premium received.

Aggressively bearish traders might place the short call closer to the money in order to obtain a larger negative delta exposure and higher premium received.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice . The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Short Call - At a Glance

Alternative name.

Uncovered Call

Pre-Requisite Strategy Knowledge

Short Stock

Legs of Trade

Sell 1 XYZ call
Short 10 XYZ January 50 calls for $1.45, less fees and commissions

Rule to Remember

Max potential profit (gain).

Net Premium Collected

Break-Even Point

The breakeven point occurs when XYZ stock price is trading equal to the strike price plus the net premium collected.

Max Potential Risk (LOSS)

Ideal outcome.

XYZ price rises significantly above the strike price plus net premium paid

Margin Requirement

Early assignment risk.

Equity options in the United States can be exercised on any business day, and the holder of a short options position has no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment must be considered when entering positions involving short options. Early assignment of options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.
The short call strategy has early assignment risk.
If the stock price is above the strike price of the short call, a decision must be made if early assignment is likely. If you believe assignment is likely and you do not want a short stock position, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be eliminated by: (1) Purchasing the call option to close out your short call position.
If early assignment of a short call does occur, stock is sold. If you do not own the stock that is to be delivered, then a short stock position is created. If you do not want a short stock position, you can close it out by buying stock in the marketplace. Important consideration : Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position.
Also, if a short option is assigned it creates a short position which may result in hard to borrow securities lending fees.

- ‌Powered by The Options Institute

Disclaimer: Cboe and Webull are separate and unaffiliated companies. This content is provided by Cboe and does not reflect the official policy or position of Webull. This content is for educational purposes only and is not investment advice or a recommendation or solicitation to buy or sell securities.

Short Call P&L Diagram
Short Call Example

How to Sell a Naked Call

Short call options strategy explained: learn the basics.

Selling an uncovered call is a bearish strategy that can benefit when the stock remains below the short call's strike price or falls.
Like other short premium options strategies, uncovered call sellers benefit from time decay, which can erode the option's value, allowing the investor to buy it back to close at a lower price to yield a potential profit.
A short call can be a more capital-efficient way of gaining short exposure to a specific underlying without having to short shares outright.
The maximum profit for a naked call is the initial credit received.
The max loss for an uncovered call is unlimited since the underlying, in theory, can rise infinitely.

Short Call Option

A short call is a neutral to bearish options trading strategy that involves selling a call contract at a strike, typically at or below the current market price of a stock. The short call strategy also goes by other names, including bear call, naked call, and uncovered call.

Selling a naked call can be an alternative method of gaining bearish exposure to a particular underlying without shorting shares outright. Investors can sell to open out-of-the-money (OTM) or in-the-money (ITM) call(s) when establishing a short call position.

The ideal scenario when selling OTM uncovered calls is when the underlying does not breach or approach the short call’s strike price over the life of the trade and expires worthless. This allows the call to erode all of its extrinsic value by the expiration of the contract to yield maximum profit. However, when selling ITM naked calls, investors require a much larger downward price move so the option goes OTM and, ideally, expires worthless to yield a maximum profit.

In-the-money (ITM) calls are usually worth more than out-of-the-money (OTM) calls because they have intrinsic value and usually extrinsic value as well. Intrinsic value describes an option's immediate value for being ITM, which is the difference between the underlying price and the strike. An option's extrinsic value depends on several factors, such as time left to expiration and implied volatility. Although short ITM calls are usually more valuable than short OTM calls and may yield greater profits if the underlying moves down, reducing the value of the call itself, they come with greater risks.

Since short calls synthetically provide bearish exposure to a specific underlying, there may be additional risks associated with holding a short call position. While ITM options generally have higher (early) assignment risk than OTM options, some situations can increase the chance of early assignment on a short call, such as dividend risk if the underlying pays one, hard-to-borrow fees when there is heightened short interest, and theoretical unlimited losses of holding short shares after assignment. When an investor is short a call, it can convert to 100 short shares per contract before expiration if assigned, and the investor will assume the risk of short shares after assignment. This risk still applies to short calls that are not assigned as it represents the theoretical equivalent of 100 shares of short stock.

Like other short option strategies, time decay can help erode an OTM call option's value when the underlying price remains stable and doesn't approach the short call option's strike price.

Maximum profit occurs when a short call remains out of the money until expiration and expires worthless. Investors do not have to wait until the contract expires to close the position. Profit can also occur when an investor buys (covers) the short call back before it expires at a price lower than it was sold for. On the contrary, an investor can incur a loss when buying back a short call at a higher price than it was sold for.

Uncovered calls are only allowed in a margin account with the highest trading level, "The Works." Eligible IRA holders must enable "IRA The Works" to sell naked calls in an IRA. Naked or uncovered calls are held at higher margin requirements in an IRA than in a non-IRA. Additionally, IRAs cannot establish or maintain a short stock position if assigned. As a result, investors assigned short shares in an IRA will receive a Short Restricted [Margin] Call and must close the position after assignment. Please visit the tastytrade Help Center to learn more about Short Restricted Strategy (SL) Calls.

Learn more about options

Expiration Risk for Naked Calls

Options that expire in the money by $0.01 or more are auto-exercised, resulting in an assignment of 100 short shares of stock for each ITM short call.

Moreover, any options strategy involving short options, including a naked short call, may face after-hours risk on the day of expiration. In summary, although the short call may have expired OTM based on the closing price of the underlying, an OTM short call option can become ITM based on any extreme upward price movement after the market close, resulting in an unexpected assignment of short shares. As a result, the investor would assume the risk of 100 short shares per contract assigned, which theoretically has unlimited risk. The only way to eliminate after-hours risk is by closing any short options positions before expiration.

It's crucial to have a plan, like closing or rolling the position before expiration, if a short share assignment is not part of your strategy. Please visit the tastytrade Help Center to learn more about Expiration Risk, including more about pin risk and after-hours risk.

Profit & Loss Diagram of a Short/Naked Call

A short/naked call can achieve a maximum profit if it expires OTM and is worthless, as illustrated in the flattened green shaded area below. Naked calls can potentially remain profitable if the underlying remains below the breakeven price, as shown where the red and green zones converge on the x-axis. This is why the short call is said to be neutral to bearish, as opposed to a purely bearish strategy like shorting shares of stock. When selling options, the max profit on the strategy is the initial credit received. A short call will incur losses if the call closes above the breakeven zone at expiration, which is defined as the short call strike plus the credit received upfront for selling the call contract. Please be mindful of assignment risk for ITM short option as assignment can happen at any time up to the expiration date. As always, manage your options positions closely.

Example of a Short Call

XYZ trading @ $45

Sell to Open -1 XYZ 50-strike call @ $4 credit

Collect a $4 credit ($400 total)

*A short call in a margin or IRA requires our highest trading level, “ The Works ” and “ IRA The Works ,” respectively.

Using the Strategy Menu

Enter a symbol.
Navigate to the Trade tab.
Go to the Table mode.
Click on an expiration date to expand.
Click the Strategy menu.
Locate the option strategy and (from left to right) click each column to display Short, Call, and Go.
The short call will appear in the expanded expiration as a red bar. Drag the bar up or down to adjust the strike.
Go to the order ticket to determine the quantity, price, time-in-force (TIF), etc., before clicking Review and Send. Review everything including commissions and fees before sending the order.

Building it Manually

Click the bid price on the strike you want to sell . The short call will appear in the expanded expiration as a red bar. Drag the bar up or down to adjust the strike.

All investments involve risk of loss. Please carefully consider the risks associated with your investments and if such trading is suitable for you before deciding to trade certain products or strategies. You are solely responsible for making your investment and trading decisions and for evaluating the risks associated with your investments.

Options involve risk and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially significant losses. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Short Call Strategies: The Profitable Approach

By Tyler Corvin

Is it possible to earn profit when the market’s at a standstill?

A short call, an integral maneuver in the intricate dance of options trading, makes it possible through the magic of options. Through the selling or “writing” of a call option, traders can align themselves to possibly harvest premiums when the market conditions are not ripe for bullish momentum.

This strategy not only caters to those with a bearish or neutral perspective on the market but also unveils compelling avenues for advanced risk management and revenue generation.

In the subsequent sections, we will unravel the intricacies of the short call strategy, delving into its workings, potential drawbacks, and the conditions under which it performs optimally. Regardless of whether you’re an experienced trader or a novice, exploring the realm of short calls aims to elevate your cognizance of options trading.

Let’s get into it.

What you’ll learn

What Exactly is a Short Call?

How does a short call work.

Constructing a Short Call

Profits and Payoffs with Short Call

Example of a Short Call

Short Calls vs. Long Puts

Pros and cons.

A short call is a key strategy in options trading, wherein the trader—termed the “writer”—sells, or “writes,” a call option. This means the trader assumes a commitment to sell the underlying asset—whether it’s stock or a commodity—at a predetermined price, known as the strike price, should the option’s buyer choose to exercise it before expiration.

When a trader chooses a short call, it usually signals their expectation that the price of the underlying asset will stay below the strike price until the option expires. This strategy is generally preferred when a trader has a bearish or neutral outlook on the market, foreseeing that the asset’s price will either decline or stay relatively steady. If the market price of the asset is below the strike price at expiration, the option won’t be exercised, allowing the writer to retain the premium acquired from selling the call option.

However, a short call does harbor unlimited risk. If the market price of the underlying asset surpasses the strike price before expiration , the trader could suffer considerable losses. Conversely, the buyer of the call option is banking on the asset’s price increasing, intending to exercise the option if it is profitable to acquire the asset at a lower price.

This approach is in stark contrast to a long call, where a trader acquires a call option and thereby the right—without obligation—to buy the underlying asset at the strike price before the option expires. A long call is generally preferred when the market sentiment is bullish.

Implementing a short call entails a trader selling a call option on an underlying asset and receiving a premium, which is the maximal profit that can be realized from this position. The trader, or the writer, is then obligated to sell the underlying asset at the decided strike price if the option buyer exercises the option before expiration.

The risk with a short call is theoretically boundless, since there is no cap on how much the price of the asset can increase. Using options alerts can add another layer to your risk management strategy, like the pros, to promptly alert you to crucial market movements, enabling timely interventions.

Entering and Exiting a Short Call

Initiating a short call involves selling call options, ideally when the market is bearish or neutral, thus securing a premium. Elevated option premiums, often due to increased implied volatility, signal ideal entry points. Employing technical analysis and other key metrics like option Greeks can help traders identify these points, ensuring alignment with their market perspective and risk acceptance levels.

Exiting a short call effectively is crucial. Typically, traders buy back the call options to close the position before expiration if the option’s value decreases, thus gaining a profit from the premium difference. If the market price of the underlying asset is below the strike price at expiration, the option is worthless, and the trader keeps the entire premium.

Nonetheless, should the market price rise above the strike price, swift actions are necessary to minimize losses, like buying back the call option or employing other options hedging strategies . Continuous monitoring and prompt adjustment of positions in response to market movements are vital for traders to manage their strategies efficiently.

Constructing a Short Call: Step-by-Step

Constructing a short call necessitates a series of careful steps to align the strategy with market outlook and risk tolerance effectively. Here’s a systematic guide to crafting a short call:

Assessment and Selection : Initiate by examining your market outlook, determining whether it leans neutral to bearish on the underlying asset. Select an underlying asset and its corresponding call option to sell, based on this examination.
Analyzing Market Conditions : Stay up-to-date with current market news, concentrating on elements like volatility that can augment the option premium, thereby increasing the potential profit from the collected premium.
Determining Strike Price and Expiry : Choose the best strike price and an expiration date . Typically, a higher strike price coupled with a near-term expiration is chosen to enhance the likelihood of the option expiring worthless.
Risk Assessment : Scrutinize the potential risks involved. Given the unlimited risk potential of short call strategies, it’s crucial to evaluate if the risk is congruent with your risk tolerance and trading goals.
Placing the Order : Once content with your evaluation, proceed to place an order to sell the call option, securing the premium once the order is executed.
Monitoring and Adjustment : Post-establishment of the position, closely observe market conditions and the price of the underlying asset. Stay ready to implement adjustments, like buying back the call option to abandon the position if the market exhibits adverse movements.
Closing the Position : The position can be concluded by either repurchasing the option before its expiration date or allowing it to expire worthless, hinging on market conditions and the trader’s appraisal.

Profits and payoffs in a short call strategy are closely linked with the received premium and the potential for unlimited risk. The received premium—secured when a trader sells a call option—is the utmost profit that the trader can garner if the option expires worthless. If the underlying asset’s price stays below the strike price at expiration, the trader keeps the whole premium.

However, the trader faces losses—potentially significant and theoretically infinite—if the price of the underlying asset overshoots the strike price. The loss is derived by deducting the received premium from the difference between the stock price and the strike price.

Let’s checkout it’s payoff diagram:

A short call obligates the seller to sell a security to the call buyer at the strike price if the call is exercised.

This diagram visually conveys the risk-reward profile inherent to a short call. When the underlying asset’s price remains beneath the strike price at expiration, the trader retains the premium, marking the highest possible profit. Conversely, any surge above the strike price equates to incremental losses, emphasizing the critical need for robust risk management in executing short call strategies.

For example, if a trader sells a call option with a $50 strike price and secures a $5 premium, and the stock price ascends to $60 at expiration, the loss equates to $5 ($60 – $50 – $5). Continuous vigilance of market conditions and asset price movements is essential to navigate potential losses and make informed risk-mitigation decisions in such scenarios.

Practical Example of a Short Call

To illustrate a short call more tangibly, consider a hypothetical situation involving an investor. The investor predicts that U.S. Silica Holdings ( SLCA ), currently valued at $14, will not witness substantial price changes in the upcoming month because the stock’s current beta is above 2.50. Consequently, they establish a short call position, selling one call option contract (equivalent to 100 shares) with a $16 strike price, and earn a $0.60 per share premium, totaling $60.

Upon reaching the expiration day, two possible scenarios can unfold:

Stock Price below Strike :

If SLCA remains below $16, the investor retains the entire premium, earning a profit. Suppose SLCA’s price remains at $14; the option then expires worthless, and his profit stands at $60, minus any transaction fees.

Stock Price above Strike :

If SLCA rises above $16, losses accrue for the investor. If the price reaches $18, they must acquire the stock at the market price ($18) and sell it at the strike price ($16), suffering a $2 per share loss. After accounting for the received premium, his net loss is $1.40 per share or $140, plus any transaction fees involved.

This scenario highlights the paramount importance of meticulous monitoring and strategic risk management in short call strategies. While the profit is restricted to the received premium, losses can escalate if the stock price significantly exceeds the strike price.

Short calls and long puts are different types of options contracts that serve varying market outlooks and risk appetites. A short call strategy is employed when one anticipates that the price of the underlying asset will remain below the strike price until expiration, with the trader benefiting from the premium received but risking substantial losses if the price increases significantly.

Conversely, a long put strategy is invoked when a trader expects a decline in the price of the underlying asset, purchasing a put option to profit from a potential decrease in value, profiting when stock prices fall . This strategy’s risk is limited to the premium paid to acquire the put option, and it offers the potential for substantial profits if the asset’s price falls significantly below the strike price.

While short calls are initiated with a neutral to bearish outlook and entail unlimited risk with limited profit potential, long puts are designed for a distinctly bearish market outlook, providing limited risk and substantial profit potential. The choice between the two largely depends on the trader’s market perception, risk tolerance, and investment objectives.

Before delving into the advantages and disadvantages of short calls, it’s pivotal to discern that this strategy isn’t a one-size-fits-all solution. A trader’s individual financial goals, risk tolerance, and market perspective play crucial roles in determining whether employing short call strategies align with their overall trading objectives.

Premium Income : The seller earns premium income immediately credited to their account when executing a short call. This provides upfront cash flow and can be a consistent source of income if executed strategically.
Profit in Sideways Market : This strategy can be profitable in a sideways or slightly bearish market as the option may expire worthless, allowing the seller to retain the premium without having to sell the underlying stock.
Hedging : When used as part of a covered call strategy , short calls can serve as a hedge, offering partial protection to a long stock position in a declining market.
Limited Upside Risk (In Covered Calls): When combined with owning the underlying asset, the risk is limited, allowing traders to leverage short calls to enhance their portfolio returns.
Unlimited Risk : The risk is unlimited in a naked short call. If the stock price rises significantly, losses can be substantial as there is no upper limit to how high a stock price can go.
Loss Potential Greater than Profit Potential : The profit is confined to the premium received, while the potential loss is unlimited. This necessitates careful risk management.
Margin Requirements : Selling a naked short call requires margin requirements, or a higher options trading level due to the high-risk nature of the strategy, potentially tying up significant capital.
Opportunity Cost: In covered call strategies, if the stock price appreciates significantly, sellers miss out on potential upside above the strike price, thereby limiting profit potential.

Employing short calls, a nuanced strategy in options trading, offers traders the opportunity to earn premium income and profit in neutral to bearish markets, emphasizing meticulous risk management and a deep understanding of market dynamics to navigate potential pitfalls effectively. The strategy can align with varied trading goals, such as hedging, speculation, or income generation. However, the inherent unlimited risks, especially in naked short calls, call for a judicious and well-informed approach to ward off extensive losses.

Comparing short calls with long puts highlighted the versatile and adaptive nature of options trading. The critical analysis of operational mechanics, potential gains, and intrinsic risks of short calls allows traders to seamlessly incorporate this strategy, enhancing their trading arsenal. It’s paramount for traders to align their approach and strategy selection with their financial objectives and risk preferences, ensuring congruence with their overall trading framework.

Weighing the balance between advantages and disadvantages and individual market perceptions is central to making insightful and cautious trading decisions. This balanced approach empowers traders to traverse the fluctuating terrains of options trading with assurance and accuracy.

Understanding the Nuances of Short Call: FAQs

What are the inherent risks involved in short call strategies.

Short call strategies, notably the naked call strategy , possess the potential for unlimited losses should the stock undergo substantial upward movements. It’s crucial to fully comprehend these risks and employ adequate risk management strategies to mitigate potential damages.

How Does One’s Market Outlook Influence the Profitability of Short Calls?

The profitability of a short call is typically higher when the market outlook is bearish or neutral. This is because unexpected surges in stock prices can lead to losses. Thus, having an accurate market outlook is essential to avoid unforeseen drawbacks.

Can Short Calls be Utilized as Effective Hedging Tools?

Absolutely, short calls, and options in general can be great hedging tools , particularly when integrated into covered call strategies. The efficacy of short calls as hedges is contingent upon multiple factors, including prevailing market conditions and the trader’s risk tolerance, making it imperative to consider these elements when employing short calls as hedges.

How Does a High Volatility Environment Impact the Valuation of a Short Call Due to Implied Volatility?

When the market is experiencing high volatility , implied volatility tends to elevate the premium of a short call, enhancing the potential income for the seller. However, it also escalates the associated risk due to the increased likelihood of substantial price fluctuations, necessitating careful consideration and management of the associated risks.

Why Might Some Traders Opt for Short Calls Over Other Trading Strategies?

Traders might lean towards short calls for various reasons, such as the allure of premium income, to speculate on a stock experiencing limited upside, or as constituents of multifaceted strategies, depending on their assessment of the market and their risk preferences. The preference for short calls over other vital strategies is usually a combination of individual trading objectives, market perspectives, and risk appetites.

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Options Exercise, Assignment, and More: A Beginner's Guide

So your trading account has gotten options approval, and you recently made that first trade—say, a long call in XYZ with a strike price of $105. Then expiration day approaches and, at the time, XYZ is trading at $105.30.

Wait. The stock's above the strike. Is that in the money 1 (ITM) or out of the money 2 (OTM)? Do I need to do something? Do I have enough money in my account? Help!

Don't be that trader. The time to learn the mechanics of options expiration is before you make your first trade.

Here's a guide to help you navigate options exercise 3 and assignment 4 —along with a few other basics.

In the money or out of the money?

The buyer ("owner") of an option has the right, but not the obligation, to exercise the option on or before expiration. A call option 5 gives the owner the right to buy the underlying security; a put option 6 gives the owner the right to sell the underlying security.

Conversely, when you sell an option, you may be assigned—at any time regardless of the ITM amount—if the option owner chooses to exercise. The option seller has no control over assignment and no certainty as to when it could happen. Once the assignment notice is delivered, it's too late to close the position and the option seller must fulfill the terms of the options contract:

A long call exercise results in buying the underlying stock at the strike price.
A short call assignment results in selling the underlying stock at the strike price.
A long put exercise results in selling the underlying stock at the strike price.
A short put assignment results in buying the underlying stock at the strike price.

An option will likely be exercised if it's in the option owner's best interest to do so, meaning it's optimal to take or to close a position in the underlying security at the strike price rather than at the current market price. After the market close on expiration day, ITM options may be automatically exercised, whereas OTM options are not and typically expire worthless (often referred to as being "abandoned"). The table below spells it out.

If the underlying stock price is...
...higher than the strike price
...lower than the strike price
If the underlying stock price is... A long call is... -->
...higher than the strike price ...ITM and typically exercised -->
...lower than the strike price ...OTM and typically abandoned -->
If the underlying stock price is... A short call is... -->
...higher than the strike price ...ITM and typically assigned -->
If the underlying stock price is... A long put is... -->
...higher than the strike price ...OTM and typically abandoned -->
...lower than the strike price ...ITM and typically exercised -->
If the underlying stock price is... A short put is... -->
...lower than the strike price ...ITM and typically assigned -->

The guidelines in the table assume a position is held all the way through expiration. Of course, you typically don't need to do that. And in many cases, the usual strategy is to close out a position ahead of the expiration date. We'll revisit the close-or-hold decision in the next section and look at ways to do that. But assuming you do carry the options position until the end, there are a few things you need to consider:

Know your specs . Each standard equity options contract controls 100 shares of the underlying stock. That's pretty straightforward. Non-standard options may have different deliverables. Non-standard options can represent a different number of shares, shares of more than one company stock, or underlying shares and cash. Other products—such as index options or options on futures—have different contract specs.
Stock and options positions will match and close . Suppose you're long 300 shares of XYZ and short one ITM call that's assigned. Because the call is deliverable into 100 shares, you'll be left with 200 shares of XYZ if the option is assigned, plus the cash from selling 100 shares at the strike price.
It's automatic, for the most part . If an option is ITM by as little as $0.01 at expiration, it will automatically be exercised for the buyer and assigned to a seller. However, there's something called a do not exercise (DNE) request that a long option holder can submit if they want to abandon an option. In such a case, it's possible that a short ITM position might not be assigned. For more, see the note below on pin risk 7 ?
You'd better have enough cash . If an option on XYZ is exercised or assigned and you are "uncovered" (you don't have an existing long or short position in the underlying security), a long or short position in the underlying stock will replace the options. A long call or short put will result in a long position in XYZ; a short call or long put will result in a short position in XYZ. For long stock positions, you need to have enough cash to cover the purchase or else you'll be issued a margin 8 call, which you must meet by adding funds to your account. But that timeline may be short, and the broker, at its discretion, has the right to liquidate positions in your account to meet a margin call 9 . If exercise or assignment involves taking a short stock position, you need a margin account and sufficient funds in the account to cover the margin requirement.
Short equity positions are risky business . An uncovered short call or long put, if assigned or exercised, will result in a short stock position. If you're short a stock, you have potentially unlimited risk because there's theoretically no limit to the potential price increase of the underlying stock. There's also no guarantee the brokerage firm can continue to maintain that short position for an unlimited time period. So, if you're a newbie, it's generally inadvisable to carry an options position into expiration if there's a chance you might end up with a short stock position.

A note on pin risk : It's not common, but occasionally a stock settles right on a strike price at expiration. So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions taken by the option holder, you may or may not be assigned—and you may not be able to trade out of any unwanted positions until the next business day.

But it goes beyond the exact price issue. What if an option is ITM as of the market close, but news comes out after the close (but before the exercise decision deadline) that sends the stock price up or down through the strike price? Remember: The owner of the option could submit a DNE request.

The uncertainty and potential exposure when a stock price and the strike price are the same at expiration is called pin risk. The best way to avoid it is to close the position before expiration.

The decision tree: How to approach expiration

As expiration approaches, you have three choices. Depending on the circumstances—and your objectives and risk tolerance—any of these might be the best decision for you.

1. Let the chips fall where they may. Some positions may not require as much maintenance. An options position that's deeply OTM will likely go away on its own, but occasionally an option that's been left for dead springs back to life. If it's a long option, the unexpected turn of events might feel like a windfall; if it's a short option that could've been closed out for a penny or two, you might be kicking yourself for not doing so.

Conversely, you might have a covered call (a short call against long stock), and the strike price was your exit target. For example, if you bought XYZ at $100 and sold the 110-strike call against it, and XYZ rallies to $113, you might be content selling the stock at the $110 strike price to monetize the $10 profit (plus the premium you took in when you sold the call but minus any transaction fees). In that case, you can let assignment happen. But remember, assignment is likely in this scenario, but it is not guaranteed.

2. Close it out . If you've met your objectives for a trade, then it might be time to close it out. Otherwise, you might be exposed to risks that aren't commensurate with any added return potential (like the short option that could've been closed out for next to nothing, then suddenly came back into play). Keep in mind, there is no guarantee that there will be an active market for an options contract, so it is possible to end up stuck and unable to close an options position.

The close-it-out category also includes ITM options that could result in an unwanted long or short stock position or the calling away of a stock you didn't want to part with. And remember to watch the dividend calendar. If you're short a call option near the ex-dividend date of a stock, the position might be a candidate for early exercise. If so, you may want to consider getting out of the option position well in advance—perhaps a week or more.

3. Roll it to something else . Rolling, which is essentially two trades executed as a spread, is the third choice. One leg closes out the existing option; the other leg initiates a new position. For example, suppose you're short a covered call on XYZ at the July 105 strike, the stock is at $103, and the call's about to expire. You could attempt to roll it to the August 105 strike. Or, if your strategy is to sell a call that's $5 OTM, you might roll to the August 108 call. Keep in mind that rolling strategies include multiple contract fees, which may impact any potential return.

The bottom line on options expiration

You don't enter an intersection and then check to see if it's clear. You don't jump out of an airplane and then test the rip cord. So do yourself a favor. Get comfortable with the mechanics of options expiration before making your first trade.

1 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price. For calls, it's any strike lower than the price of the underlying equity. For puts, it's any strike that's higher.

2 Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.

3 An options contract gives the owner the right but not the obligation to buy (in the case of a call) or sell (in the case of a put) the underlying security at the strike price, on or before the option's expiration date. When the owner claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option.

4 Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock. For every option trade there is a buyer and a seller; in other words, for anyone short an option, there is someone out there on the long side who could exercise.

5 A call option gives the owner the right, but not the obligation, to buy shares of stock or other underlying asset at the options contract's strike price within a specific time period. The seller of the call is obligated to deliver, or sell, the underlying stock at the strike price if the owner of the call exercises the option.

6 Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the options contract's strike price within a specific time period. The put seller is obligated to purchase the underlying security at the strike price if the owner of the put exercises the option.

7 When the stock settles right at the strike price at expiration.

8 Margin is borrowed money that's used to buy stocks or other securities. In margin trading, a brokerage firm lends an account owner a portion of the purchase price (typically 30% to 50% of the total price). The loan in the margin account is collateralized by the stock, and if the value of the stock drops below a certain level, the owner will be asked to deposit marginable securities and/or cash into the account or to sell/close out security positions in the account.

9 A margin call is issued when your account value drops below the maintenance requirements on a security or securities due to a drop in the market value of a security or when a customer exceeds their buying power. Margin calls may be met by depositing funds, selling stock, or depositing securities. Charles Schwab may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in the interests of both parties.

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Covered Call Assignment – How To Avoid It & What To Do If Assigned

posted on May 5, 2023

Imagine you have a Covered Call right now and the underlying stock is now above your Covered Call strike price.

You’re panicking now because if you get assigned on the Covered Call, you will be Short 100 shares.

The worst part is that you don’t have the necessary capital to meet the margin requirement of Shorting the 100 shares.

And that would result in a margin call.

So what do you do?

And how do you avoid getting the risk of early assignment on your Covered Call?

What Happens When You’re Assigned On Your Covered Call?

Let’s assume you already own 100 shares of Amazon (Ticker: AMZN).

Then you sell a Covered Call at the strike price of 135.

If AMZN settles anywhere above $135 at the expiration date of the Covered Call, then your 100 shares will be called away at that price.

That means your 100 shares would be sold at $135.

When Are You In Danger Of Early Assignment?

So when is your Covered Call in danger of getting assigned early?

There’s always the possibility of early assignment when:

Your Covered Call is In-The-Money (ITM). That means the current stock price is above your Covered Call strike price.
And when your Covered Call is close to expiration.
And when your extrinsic value is very little.
And if the stock pays a dividend, you could get assigned early if the dividend paid is more than the extrinsic value.

In short, the main factor that determines whether you are in danger of getting assigned early is when the extrinsic value is very little.

That’s because when there’s little extrinsic value left in your Covered Call, there’s not much incentive left for the buyer to hold on to the Call Option.

So it’s very important to pay attention to how much extrinsic value is left in your Covered Call.

The good news is that getting assigned early is actually very rare.

To understand a little better why this is so, we need to get into the minds of the Call buyer (the person taking the opposite trade of your Covered Call).

Understanding The Mindset of Call Buyers

For this, let’s use the same example as we did earlier.

And let’s also assume that for selling the 135 strike price Covered Call you received a premium of $1.50.

Now let’s switch sides and imagine you’re now the Call buyer that just purchased the Call Option for $1.50.

Next, we want to come up with the different scenarios that might happen and see if you would exercise your Call Option early for each of them.

Scenario 1: Stock goes to $140.

In this scenario, the stock has gone up to $140 and your Call Option has now increased to $6.00:

$5.00 in intrinsic value.
$1.00 in extrinsic value.

By exercising your Call Option, you would be buying 100 shares of the underlying stock at $135.

And you will forfeit your extrinsic value of $1.00.

Knowing this, would you exercise your Call Option?

Let’s compare exercising versus selling off your Call Option.

If you exercise and you sell off your shares immediately after exercising, your profits would be:

[($140 – $135) x 100 shares] – $150 for purchasing the Call Option = $350

If you just sold off your Call Option, your profits would be:

($6.00 – $1.50) x 100 shares = $450

As you can see, you would have made more money if you had simply sold off your Call Option.

That’s because the extrinsic value boosted your profits.

But if you exercised your Call Option, you forfeited the extra $100 in profits.

Furthermore, exercising can come with extra fees from some brokers.

So in this scenario, it’s highly unlikely that the Call Buyer would exercise their Call Option, even if it’s ITM.

Scenario 2: Stock goes to $150.

Now what if the stock went higher to $150 instead?

In this scenario, your Call Option is now worth $15.25:

$15.00 in intrinsic value.
$0.25 in extrinsic value.

If you are the Call Buyer, would you exercise your Call Option now?

If you do, you’d be giving up $0.25 in extrinsic value.

That’s $25 in additional profits that you would miss out on by exercising.

I’m pretty sure it’s unlikely that you would exercise because I wouldn’t as well.

While $25 may not be much, it’s still money that we leave on the table by exercising.

So it makes no sense for us to exercise the Call Option and get into a Long stock when there’s still lots of time left before expiration.

If we really wanted to buy the stock, we still can wait till the last few days to expiration before deciding whether to exercise the Long Call or not.

So as you can see, extrinsic value plays a big part in the Call buyer’s decision whether to exercise the Call Option or not.

Scenario 3: Stock goes to $140 but goes ex-dividend tomorrow paying a dividend of $0.50.

This scenario is similar to scenario 1, but the difference is that the stock will be paying a dividend.

This is where a Short Call can have dividend risk.

That means that the Call buyer may want to exercise their Option to get into a Long stock position to get the dividends.

So in this scenario, your Call Option’s value is the same as scenario 1 which is $6.00:

However, the underlying stock will be paying a dividend of $0.50.

If you’re the Call buyer, would you exercise your Long Call?

Let’s compare exercising versus selling the Call Option.

If you exercise it, you will forfeit the $1.00 in extrinsic value, but gain the dividend of $0.50.

But if you sell the Call Option, you will forfeit the $0.50 dividend, but profit on the $1.00 in extrinsic value.

So in this scenario, you would gain more by simply selling the Call Option.

Hence, it’s for the Covered Call to get assigned in this scenario.

Scenario 4: Stock goes to $150 but goes ex-dividend tomorrow paying a dividend of $0.50.

This scenario is similar to scenario 2 but the stock goes ex-dividend tomorrow with a dividend payout of $0.50.

In this scenario, your Call Option’s value is $15.25:

But there’s a dividend payout of $0.50.

In this scenario, if you were the Call buyer, would you exercise your Long Call?

If we applied the same analysis as in scenario 3, then we would know that it makes sense to exercise the Call Option now because the dividend is greater than the extrinsic value.

That means by exercising the Call Option, you’d gain an additional $0.25 compared to if you hadn’t exercised your Long Call.

So in this scenario, there’s a high likelihood of getting assigned early.

How To Avoid Early Assignment

So how do you avoid the risk of early assignment?

By rolling your Covered Call .

When you roll, you’re adding duration to your Covered Call.

And by adding duration, you’re adding extrinsic value.

Remember, extrinsic value is simply time value.

The more days left to expiration, the more extrinsic value there is.

Additionally, when rolling, you have the choice to roll your Covered Call up as well.

That means you roll to a higher strike on top of rolling to a further expiration date.

This way you increase the chances of Covered Call working out.

But what if you’re already assigned?

If you’re already assigned and your shares have been called away, there are 3 things you can do:

Buy your shares back immediately if you’re afraid the stock will continue rallying.
Wait for a pullback before buying again.
Sell a Cash Secured Put at the price you were called away.
Find other trades.

At the end of the day, having your shares called away isn’t the end of the world.

You’ve already made a profit (assuming your Covered Call was above your entry price), and you can always find another trade.

And if you think the stock will keep going up in the long term, then just buy back the stock because you would still be in profit if you’re right on your long-term view.

Reader Interactions

Assignment Risk, Short Calls, And Ex-Dividend Dates

If you are short call options in a stock or an Exchange Traded Product (ETP) like SPY or IWM you need to be aware of ex-dividend dates. If your calls are in the money, even barely, your options may be assigned right before the security goes ex-dividend—and then you may have a problem.

For example, let’s say you hold a credit call spread position: short calls with lower strikes and long calls at higher strike prices. If your short calls are assigned the night before the underlying goes ex-dividend you will wake up to find yourself no longer with an option spread, but short the security and half of your option spread remaining.

First the good news:

Your overall risk profile hasn’t changed much, you still have the long calls protecting you if the underlying moves up
Your theoretical maximum profits on the position are higher if the underlying drops because your gains are no longer limited by the strike price of your short position
You’ve collected the entire time premium from your short call position—you’ll only be down the intrinsic value of the call, the amount it was in the money.

The bad news:

Since you were short the security when it went ex-dividend you now owe the dividend on the security. That amount will be deducted from your account when the dividend is distributed. Your potential worst case loss from your position has been increased by that amount.
Do you have the margin in your account to support the short position in the underlying? If not you will shortly be getting a “courtesy” call from your broker suggesting that you add funds or liquidate your short position. There will be a deadline.
If the security you just went short is “hard to borrow” you will be getting a call from your broker. Your short position exists, but actual shares have to be borrowed to sustain it more than a couple of days. Extra fees may be involved, or if shares can’t be found to borrow you’ll have to cover the position.
Is your spread position in an IRA? If so being short a security is a definite problem—not allowed by the IRS. You must cover the short within a day or two—if not your broker will do it for you. Luckily this will not result in a “ free riding violation ” because the cash generated by your short sale will be available in time to cover the purchase.

Call owners with in the money (ITM) options will typically exercise their options the evening before the ex-dividend date. Holding the calls through the ex-dividend would cost them money because the underlying security usually drops in value when it goes ex-dividend. At market open the drop in the securities’ price will usually roughly match the dividend amount.

In addition to assignment risk, the other thing to watch with ex-dividend dates is distortion in the implied volatility (IV) of options. For example, the IV of deep ITM calls will be distorted because the market will not give you a profitable low-risk trade (e.g., a covered call with deep ITM calls virtually certain to be assigned). You can create this position, but the premium from selling the calls will be non-existent, and therefore only risk and no profit.

Notice the implied volatility of zero on the bid side of the SPY ITM options a few days before the security goes ex-dividend:

At the money (ATM) calls will also have reduced IVs. Normally these won’t be assigned because they will have premiums higher than the dividend payout. On the ex-dividend date you’ll see their IV’s jump up—just enough such that the call prices don’t move despite any drop in the underlying. No easy money here.

If you find yourself the day before ex-dividend with ITM short calls there are a couple things you can do:

Sit tight and take the risk that the options be assigned—not all ITM calls will be exercised. The deeper they are in the money, the higher the likelihood they will be assigned.
Roll your short options up to a higher strike price. This should be done late in the day when it is unlikely that the underlying will move significantly before market close
Close out your entire position

One of the advantages of options on indexes like SPX (S&P 500) and RUT (Russell 2000) is that they don’t pay dividends—hence no worries about ex-dividend dates.

For special dividends, option strike prices are often adjusted to protect option holders from unforeseen corporate actions. For more see Profiting from Special Dividends .

It’s possible to use options to lower risks while collecting dividends, but it’s not a slam dunk. For more information see Dividend Capture With Covered Calls .

Click here to leave a comment

5 thoughts on “assignment risk, short calls, and ex-dividend dates”.

Would it be accurate to say the SPX call options still price in dividends the SPY would receive but cannot be called away due to being European-style?

The SPX calculation does not make any adjustments for regular dividends, so there will be a subtle drop in the index when individual stocks go ex-dividend. I doubt that calls could be used to capture this drop–if the drop was going to be considerable, say with multiple stocks going ex on the same day the option markets would probably compensate by lowing the IV before the ex and raising it on the day of.

I trade in Brazil. In the brazilian exchange(BMFBOVESPA), when a stock goes ex, all the options on it also have their strike lowered to match the dividend, so this does not happen here (the exercise of ITM stock calls). However, sometimess our index futures are below the spot index (due to the loan rate on the index components being higher than the risk free rate), and some american ITM calls on the spot index get exercised early, so in these ocasions american and european(both available) have different prices.

Hi Kurast, That’s interesting. You must get used to having lots of different strike prices..

Hi, Kurast. Turquoise does the same for Russia originated depository receipts. I thought it was a unique practice on this exchange, but you confirmed BM&F did the same.

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Short calendar spread with calls

Potential goals.

To profit from a large stock price move away from the strike price of the calendar spread with limited risk if there is little or no price change.

Explanation

A short calendar spread with calls is created by selling one “longer-term” call and buying one “shorter-term” call with the same strike price. In the example a two-month (56 days to expiration) 100 Call is sold and a one-month (28 days to expiration) 100 Call is purchased. This strategy is established for a net credit (net receipt), and both the profit potential and risk are limited. The maximum profit is realized if the stock price is far above or far below to the strike price on the expiration date of the long call, and the maximum risk is realized if the stock price is at the strike price.

Example of short calendar spread with calls

Maximum profit.

The maximum profit potential of a short calendar spread with calls is the net credit received less commissions. This profit is realized if the stock price is either far above or far below the strike price of the calendar spread at expiration of the long call. Whether the stock price rises or falls, if it moves sharply away from the strike price, then the difference between the two calls approaches zero and the full amount received for the spread is kept as income. For example, if the stock price falls sharply, then the price of both calls approach zero for a net difference of zero. If the stock price rises sharply so that both calls are deep in the money, then the prices of both calls approach parity for a net difference of zero.

Maximum risk

The potential maximum risk of a short calendar spread with calls is unlimited if the long call expires worthless and short call (with a later expiration date) remains open. It is therefore essential to monitor a short calendar spread position as the expiration date of the long call approaches.

Assuming that the long call is open, the maximum risk of a short calendar spread with calls occurs if the stock price equals the strike price of the calls on the expiration date of the long call. This is the point of maximum loss, because the short call has maximum time value when the stock price equals the strike price. Also, since the long call expires worthless when the stock price equals the strike price at expiration, the difference in price between the two calls is at its greatest.

It is impossible to know for sure what the maximum loss will be, because the maximum loss depends of the price of short call which can vary based on the level of volatility.

Breakeven stock price at expiration of the long call

Conceptually, there are two breakeven points, one above the strike price of the calendar spread and one below. Also, conceptually, the breakeven points are the stock prices on the expiration date of the long call at which the time value of the short call equals the original price of the calendar spread. However, since the time value of the short call depends on the level of volatility, it is impossible to know for sure what the breakeven stock prices will be.

Profit/Loss diagram and table: short calendar spread with calls

*Profit or loss of the short call is based on its estimated value on the expiration date of the long call. This value was calculated using a standard Black-Scholes options pricing formula with the following assumptions: 28 days to expiration, volatility of 30%, interest rate of 1% and no dividend.

Appropriate market forecast

A short calendar spread with calls realizes its maximum profit if the stock price is either far above or far below the strike price on the expiration date of the long call. The ideal forecast, therefore, is for a “big stock price change when the direction of the change could be either up or down.” In the language of options, this is known as “high volatility.”

Strategy discussion

A short calendar spread with calls is a possible strategy choice when the forecast is for a big stock price change but the direction of the change is uncertain. Short calendar spreads with calls are often established before earnings reports, before new product introductions and before FDA announcements. These are typical of situations in which “good news” could send a stock price sharply higher, or “bad news” could send a stock price sharply lower. The risk is that the announcement does not cause a significant change in stock price and, as a result, the price of the short calendar spread increases and a loss is incurred.

It is important to remember that the prices of options – and therefore the prices of calendar spreads – contain the consensus opinion of options market participants as to how much the stock price will move prior to expiration. This means that sellers of calendar spreads believe that the market consensus is “too low” and that the stock price will move beyond a breakeven point – either up or down.

The same logic applies to options prices before earnings reports and other such announcements. Dates of announcements of important information are generally publicized in advanced and are well-known in the marketplace. Furthermore, such announcements are likely, but not guaranteed, to cause the stock price to change dramatically. As a result, prices of calls, puts and calendar spreads adjust prior to such announcements. In the language of options, this is known as an “increase in implied volatility.”

An increase in implied volatility increases the risk of trading options. For sellers of calendar spreads, higher implied volatility means that breakeven points are farther apart and that the underlying stock price has to move further to achieve breakeven.

“Selling a calendar spread” is intuitively appealing, because “you can make money if the stock price rises or falls.” The reality is that the market is often “efficient,” which means that prices of calendar spreads frequently are an accurate gauge of how much a stock price is likely to move prior to expiration. This means that selling a calendar spread, like all trading decisions, is subjective and requires good timing for both the position entry decision and the exit decision.

Impact of stock price change

“Delta” estimates how much a position will change in price as the stock price changes. Long calls have positive deltas, and short calls have negative deltas. The net delta of a short calendar spread with calls is usually close to zero, but, as expiration approaches, it varies from −0.50 to +0.50 depending on the relationship of the stock price to the strike price of the spread.

With approximately 20 days to expiration of the short call, the net delta varies from approximately −0.10 with the stock price 5% below the strike price to +0.10 with the stock price 5% above the strike price.

With approximately 10 days to expiration of the short call, the net delta varies from approximately −0.20 with the stock price 5% below the strike price to +0.20 with the stock price 5% above the strike price.

When the stock price is slightly below the strike price as expiration approaches, the position delta approaches −0.50, because the delta of the short call is approximately −0.50 and the delta of the long call approaches 0.00.

When the stock price is slightly above the strike price as expiration approaches, the position delta approaches +0.50, because the delta of the shprt call is approximately −0.50 and the delta of the long call approaches +1.00.

The position delta approaches 0.00 if the calls are deep in the money (stock price above strike price) or far out of the money (stock price below strike price). If the calls are deep in the money, then the delta of the short call approaches −1.00 and the delta of the long call approaches +1.00 for a net spread delta of 0.00. If the calls are out of the money, then the deltas of both calls approach 0.00.

Impact of change in volatility

Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices tend to rise if other factors such as stock price and time to expiration remain constant. Long options, therefore, rise in price and make money when volatility rises, and short options rise in price and lose money when volatility rises. When volatility falls, the opposite happens; long options lose money and short options make money. “Vega” is a measure of how much changing volatility affects the net price of a position.

Since a short calendar spread with calls has one short call with more time to expiration and one long call with the same strike price and less time, the impact of changing volatility is slightly negative, but very close to zero. The net vega is slightly negative, because the vega of the short call is slightly greater than the vega of the long call. As expiration approaches, the net vega of the spread approaches the vega of the short call, because the vega of the long call approaches zero.

Impact of time

The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion. “Theta” is a measure of how much time erosion affects the net price of a position. Long option positions have negative theta, which means they lose money from time erosion, if other factors remain constant; and short options have positive theta, which means they make money from time erosion.

Since a short calendar spread with calls has one short call with more time to expiration and one long call with the same strike price and less time, the impact of time erosion is negative if the stock price is near the strike price of the calls. In the language of options, this is a “net negative theta.” Furthermore, the negative impact of time erosion increases as expiration approaches, because the value of the short-term long at-the-money call decays at an increasing rate.

If the stock price rises above or falls below the strike price of the calendar spread, however, the impact of time erosion becomes slightly positive. In either of these cases, the time value of the shorter-term long call approaches zero, but the time value of the longer-term short call remains positive and decreases with passing time.

Risk of early assignment

Stock options in the United States can be exercised on any business day, and holders of short stock option positions have no control over when they will be required to fulfill the obligation. Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options.

While the long call in a short calendar spread with calls has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned.

If assignment is deemed likely and if a short stock position is not wanted, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be eliminated in two ways. First, the entire spread can be closed by selling the long call to close and buying the short call to close. Alternatively, the short call can be purchased to close and the long call can be kept open.

If early assignment of the short call does occur, stock is sold, and a short stock position is created. If a short stock position is not wanted, there are two choices. First, the short stock position can be closed by exercising the long call. Second, shares can be purchased in the marketplace and the long call can be left open. Generally, if there is time value in the long call, then it is preferable to purchase shares and sell the long call rather than exercise it. It is preferable to purchase shares in this case, because the time value will be lost if the long call is exercised. Also, generally, if the longer-term short call in a short calendar spread is assigned early, then there is little or no time value in the shorter-term long call. In this case it is usually preferable to close the unwanted short stock position by exercising the long call. Such action then closes the entire position and frees up capital for other uses.

Note, also, that whichever method is used to close the short stock position, the date of the stock purchase will be one day later than the date of the short sale. This difference will result in additional fees, including interest charges and commissions. Assignment of a short call might also trigger a margin call if there is not sufficient account equity to support the short stock position.

Potential position created at expiration of the short call

If the short call is assigned after the long call expires, then stock is sold short and a straight short stock position is created and the potential risk is unlimited.

However, if the short call is assigned prior to expiration of the long call, then stock is sold short and the result is a two-part position consisting of short stock and long call. This position has limited risk on the upside and substantial profit potential on the downside. If a trader has a bearish forecast, then this position can be maintained in hopes that the forecast will be realized and a profit earned. If the short stock position is not wanted, then the position must be closed either by exercising the call or by purchasing stock and selling the call (see Risk of Early Assignment above).

Other considerations

Short calendar spreads with calls are frequently compared to long straddles and long strangles, because all three strategies profit from “high volatility” in the underlying stock. The differences between the three strategies are the initial cost, the risk and the profit potential. In dollar terms, straddles and strangles cost much more to establish, have greater, albeit limited, risk and have unlimited profit potential. Short calendar spreads, in contrast, require less capital (margin requirement) to establish, have a smaller limited risk and have limited profit potential. One should not conclude, however, that traders with limited capital should prefer short calendar spreads to long straddles or long strangles. The risk of a short calendar spread is still 100% of the capital committed. The decision to trade any strategy involves choosing an amount of capital that will be placed at risk and potentially lost if the market forecast is not realized. In this regard, choosing a short calendar spread is similar to choosing any strategy.

The short calendar spread with calls is also known by two other names, a “short time spread” and a “short horizontal spread.” “Short” in the strategy name implies that the strategy is established for a net credit, or net receipt of cash. The terms “time” and “horizontal” describe the relationship between the expiration dates. “Time” implies that the options expire at different times, or on different dates. The term “horizontal” originated when options prices were listed in newspapers in a tabular format. Strike prices were listed vertically, and expirations were listed horizontally. Therefore a “horizontal spread” involved options in the same row of the table; they had the same strike price but they had different expiration dates.

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Categories: Options Trading

Last updated on February 14th, 2022 , 08:22 am

Short Call And Put Options Are Rarely Assigned. Here’s Why.

In fifteen years as an options broker, I don’t recall once dealing with an advisor or customer who traded options with the intent of transferring their options into stock, which happens during the exercise/assign process. Whenever assignments did happen, there was seldom a happy person on the other end of the line.

This makes sense – if you want the stock, why not just buy/sell it outright? You have infinite flexibility when buying/selling stock. You can choose the number of shares, the price of execution, and even the time of your fill.

This isn’t always the case with options. When we’re talking option assignment/exercisement, we’re talking about round lots of 100 shares. This is very costly and rarely matches an investor’s risk profile (100 shares of AMZN would currently cost you $360,000). Additionally, with short option positions , sometimes you don’t know when/if you’ll be assigned.

Assignment Risk Odds

This assignment risk, however, is often minimal and can be mitigated entirely if you understand the product you are trading. In this article, projectoption takes a deep dive into option assignment and shows why this common fear for investors short call and put options rarely materializes. At the heart of the rationale behind all option exercisements and assignments is something called “extrinsic value”, which we will examine closely.

Before we get started, let’s do a brief recap of how the exercise/assign process works. We are first going to do a recap of American and European styled options as the latter has no assignment risk.

Only “American Style” options can be early exercised/assigned.
An option’s value is composed entirely of “intrinsic” or “extrinsic” value.
Intrinsic value is the amount an option is in-the-money-by.
Extrinsic value (implied volatility + time decay) is the difference between the market price of an option and its intrinsic value.
In-the-money call options could face dividend-risk.

Why Options Are Rarely Assigned

New to options trading? Learn the essential concepts of options trading with our FREE 160+ page Options Trading for Beginners PDF.

European vs American Style Options

If you own a call or put option, you generally will have the right to exercise that option at any time before the expiration. The exception to this rule is European-style options, such as S&P 500 Index ( SPX ) and the NASDAQ-100 Index ( NDX ). These index options are cash-settled at the expiration date, so they cannot be exercised prior to expiration.

However, the vast majority of tradable options are American style, meaning they can be exercised at any time. This applies to nearly all options on equities. If you’d like an education on how these two styles of options differ, please read our article SPX vs SPY: Here’s How They Differ . If you’re interest in trading volatility, our VIX vs VIX article may be more fitting.

Since there is no assignment risk with European Style index options, this article is going to focus on American style options. If you truly want to eradicate all risks of early assignment, simply stick with European styled options and you’ll have nothing to worry about.

Exercising a Call/Put Option

The owner of long (American style) call and put options have the right to exercise their position at any time prior to that options expiration. If you exercise a call option, you will convert that option into stock by purchasing 100 shares of the underlying stock at the call’s stock price.

If you are long a call option with a strike price of $120 and decide to exercise this option, two transactions will occur.

You will buy 100 shares of that stock at $120/share
The party that is short that particular option will be assigned, and forced to sell 100 shares at $120, leaving a short position of 100 shares in their account .

Why may an investor consider exercising a long call contract?

Let’s say that the price of the underlying on that $120 call is currently trading at $135. If you’re long that call, you could exercise that contract, obtain the long shares for $120, then immediately sell it for its current market price of $135, netting a profit of $15/share. That $15 is also known as the option’s “intrinsic value”. Let’s go over what this term means next.

Intrinsic Value

Intrinsic value in options trading is the difference between the current price of a stock and the strike price of the option. Only in-the-money options have intrinsic value. This value represents the benefit of buying (calls) or selling (puts) shares of stock at the options strike price rather than the current stock price.

Here’s are the details of our trade above.

Call Strike Price: $120

Current Stock Price: $135

Intrinsic value: $15

If we exercise our long call, we will purchase the shares $15 below the market price, which is obviously advantageous. But is this the most profitable way to cash in on our option? Absolutely not. In fact, we’ll be giving money away. Let’s next learn about extrinsic value to determine why.

Extrinsic Value

All option values are composed of intrinsic and/or extrinsic values. Extrinsic value ( implied volatility + time decay (theta) is the difference between the market price of an option and its intrinsic value. In other words, it’s everything that’s “leftover” from intrinsic value.

The below visual illustrates the different components of an option’s value.

Not all options have intrinsic value. Actually, the value of out-of-the-money options is all extrinsic value. Out-of-the-money options generally do not pose an assignment risk. Why? Let’s revisit our above example but with a different underlying stock price of $110.

Current Stock Price: $110

Intrinsic value: 0

If you are long that $120 call and decided to exercise your option, you would buy 100 shares of the underlying stock at $120. Does this make sense? No! You just threw away $10/share. Why not just buy the stock for $10 cheaper in the market for $110?

Since the long party won’t exercise out-of-the-money positions, the short party should therefore have little, if anything, to worry about regarding assignment risk.

Why In-The-Money Options Are Rarely Exercised

But in truth, even in-the-money options are rarely exercised. Why? It makes more financial sense for an investor to simply sell their option contract in the open market rather than convert it to shares. Once you understand why it often doesn’t make sense for a long holder to exercise their contract, it should give you more peace of mind on your short position being assigned.

In order to understand this, we are going to switch over to the tastyworks platform and look at a few examples, starting with exercising a long call.

Exercising a Long Call

In this example, we are looking at a deep-in-the-money 270 call on Apple (AAPL) which we paid 25 ($2,500) for. Here are the details of the trade:

AAPL Stock Price : $314.94

Call Strike Price : 270

Initial Price Paid for Call : 25 ($2,500)

Option Market Current Value : 46.8 ($4,680)

Intrinsic Value : 44.94 ($4,494)

Now right off the bat, we’re going to take notice that the intrinsic value of the option (44.94) is smaller than the call option’s current market price (46.80). This should be a red flag right away concerning exercisement – keep that in mind.

So let’s say we decide to exercise our 270 AAPL call option and immediately sell the stock received to lock in our profit. Here are the details of this transaction:

Exercise 270 Call : Buy 100 shares at $270/share for a cost of $27,000

Sell Stock : Sell 100 shares of AAPL stock at $314.94/share and receive $31,494

Net Credit Received (profit) : $31,494 – $27,000 = $4,494

Net Profit Made: $4,494 – $2,500 (initial debit paid) = $1,994

So the net credit received on this position from exercising our option is $1,994. Not bad, but you could have done better!

Selling a Long Call in the Open Market

Let’s back up a bit here. Remember the current value of the options contract? It is trading at $46.80, the monetary value of which is $4,680. Our net proceeds from exercising the call were only $4,494. See the problem?

We would have netted $186 more ($4,680 – $4,494) had we simply sold the option outright!

Net Profit From Exercising Call : $1,994

Net Profit from Selling Call in the Market : $2,180

So why the discrepancy in selling vs exercising?

Understanding What We Learned

Earlier, we talked upon extrinsic and intrinsic value. Together, these two values comprise an option’s entire premium.

Remember the intrinsic value of our call option above was 44.94 and the current market price of that option was 46.80? Since an option’s value is either intrinsic or extrinsic, we can determine that the extrinsic value of this option is 46.80-44.94 = 1.86.

We touched earlier on this number above; $186 was the additional premium we would receive if we sell the option in the open market. This number is also always synonymous with an option’s extrinsic value.

When you exercise an option with extrinsic value, you are forfeting that additional premium. This premium is comprised of implied volatility and future time value, or, the derivatives extrinsic value.

Dividend Risk: Exceptions to the Rule

Not covered yet in this article is something called “dividend risk”. Options traders must monitor their short call positions closely for any dividend being paid out on the underlying. Why? Option contracts don’t receive a dividend. Therefore, investors long in-the-money call options will likely exercise their contract in order to receive the shares, which do indeed pay a dividend.

If this dividend is greater than an options extrinsic value, short in-the-money call positions will likely be assigned in the days leading up to the ex-dividend date. If you have a tastyworks account, you can always call their trade desk and ask a pro about your chances of being assigned.

When you exercise an option early, you are very likely to forego any additional extrinsic value. It is because of this that short options with a lot of extrinsic value are rarely assigned.

This doesn’t mean, however, short options are never assigned. If you are short a very deep-in-the-money call or put option in the days leading up to expiration, the extrinsic value will decay and there is a good chance you will be assigned. In fact, it has been estimated that just over 10% of all option contracts will be exercised, and thus assigned, in their lifespan.

Additionally, if you fail to trade out of your short-in-the-money option before assignment, you will get assignment 99.999% of the time.

Next Lesson

Dangers of After Hours Options Assignment
Option Trading for Beginners: The ULTIMATE Guide
3 Examples of How Time Changes Option Deltas

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➥ Neutral Strategies

➥ Vertical Spreads Guide

☆ Options Trading for Beginners ☆

➥ Basics of Calls and Puts

➥ What is a Strike Price?

➥ Option Expiration

➥ Intrinsic and Extrinsic Value

➥ Exercise and Assignment

➥ The Bid-Ask Spread

➥ Volume and Open Interest

➥ Option Chain Explained

➥ Option Greeks 101

➥ Delta Explained

➥ Gamma Explained

➥ Theta Explained

➥ Vega Explained

➥ Implied Volatility Basics

➥ What is the VIX Index?

➥ The Expected Move

➥ Trading VIX Options

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➥ IV Rank vs. IV Percentile

➥ Option Order Types 101

➥ Stop-Loss Orders On Options Explained

➥ Stop Limit Order in Options: Examples W/ Visuals

➥ Limit Order in Option Trading Explained w/ Visuals

➥ Market Order in Options: Don’t Throw Away Money!

➥ TIF Orders Types Explained: DAY, GTC, GTD, EXT, GTC-EXT, MOC, LOC

Additional Resources

Trading Options: Understanding Assignment | FINRA.org

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What Is a Short Call?

How a short call works, short calls vs. long puts.

Options and Derivatives
Strategy & Education

What Is a Short Call in Options Trading, and How Does It Work?

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

A short call is an options position taken as a trading strategy when a trader believes that the price of the asset underlying the option will drop. Therefore, it's considered a bearish trading strategy .

Short calls have limited profit potential and the theoretical risk of unlimited loss. They're usually used only by experienced traders and investors.

Key Takeaways

A call option gives the buyer of the option the right to purchase underlying shares at the strike price before the contract expires.
When an investor sells a call option, the transaction is called a short call.
A short call requires the seller to deliver the underlying shares to the buyer if the option is exercised.
A short call is a bearish trading strategy, reflecting a bet that the security underlying the option will fall in price.
The goal of the trader who sells a call is to make money from the premium and see the option expire worthless.

A short call strategy is one of two simple ways options traders can take bearish positions. It involves selling call options , or calls. Calls give the holder of the option the right to buy the underlying security at a specified price (the strike price ) before the option contract expires.

The seller, or writer, of the call option receives the premium the buyer pays for the call. The seller must deliver the underlying shares to the call buyer if the buyer exercises the option.

The success of the short call strategy rests on the option contract expiring worthless. That way, the trader banks the profit from the premium. The expired position will be removed from their account.

For this to happen, the price of the underlying security must fall below the strike price. If it does, the buyer won't exercise the option.

If the price rises, the option will be exercised because the buyer can get the shares at the strike price and immediately sell them at the higher market price for a profit.

For the seller, there’s unlimited exposure during the length of time the option is viable. That's because the underlying security's price could rise above the strike price during this time, and keep rising. The option would be exercised at some point before expiration. Once that happens, the seller has to go into the market and buy the shares at the current price. That price could potentially be much higher than the strike price that the buyer will be paying.

A seller of a call who doesn't already own the underlying shares of an option is selling a naked short call. To limit losses, some traders will exercise a short call while owning the underlying security. This is known as a covered call . Or, alternatively, they may simply close out their naked short position, accepting a loss that's less than what they'd lose if the option were assigned (exercised).

Example of a Short Call

Say that shares of Humbucker Holdings are trading near $100 and are in a strong uptrend. However, based on a combination of fundamental and technical analyses, a trader believes that Humbucker is overvalued. They feel that, eventually, it will fall to $50 a share.

With that in mind, the trader decides to sell a call with a strike price of $110 and a premium of $1.00. They receive a net premium credit of $100 ($1.00 x 100 shares).

The price of Humbucker stock does indeed drop. The calls expire worthless and unexercised. The trader gets to enjoy the full amount of the premium as profit. The strategy worked.

However, things could instead go awry. Humbucker share prices could continue moving up rather than go down. This creates a theoretically limitless risk for the call writer.

For example, say the shares move up to $200 within a few months. The call holder exercises the option and buys the shares at the $90 dollar strike price. The shares must be delivered to the call holder. The call writer enters the market, buys 100 shares at the current market price of, it turns out, $200 per share. This is the trader's result:

Buy 100 shares at $200 per share = $20,000

Receive $90 per share from buyer = $9,000

Loss to trader is $20,000 - $9,000 = ($11,000)

Trader applies $100 premium received for a total loss of ($10,900)

Short calls can be extremely risky due to the potential for loss if they're exercised and the short call writer has to buy the shares that must be delivered.

As previously mentioned, a short call strategy is one of two basic bearish strategies involving options. The other is buying puts . Put options give the holder the right to sell a security at a certain price within a specific time frame. Going long on puts, as traders say, is also a bet that prices will fall, but the strategy works differently.

Say that our trader still believes Humbucker stock is headed for a fall. They opt to buy a put with a $90 strike price for a $1.00 premium. The trader spends $100 for the right to sell shares at $90 even if the actual market price falls to $50. Of course, if the stock does not drop below $90, the trader will have lost the premium paid for the protection.

What's a Short Call?

When investors sell a call option, the transaction is called a short call. Short is a trading term that refers to selling a security.

Why Would Someone Sell Call Options?

Investors who believe that the price of a security is going to fall might sell calls on that security simply for income. In other words, they'll profit just from the premium they received for selling the option. However, for the strategy to succeed, the option has to expire unexercised by the buyer.

What's the Risk of a Naked Short Call?

A naked short call refers to a situation where traders sell call options but don't already own the underlying securities that they would be obligated to deliver if the buyer exercises the calls. So, the risk is that the market price for the security goes up above the option strike price, the buyer exercises the option, and traders must enter the market to buy the securities for a price way above what they'll receive for them (the strike price).

U.S. Securities and Exchange Commission. " Investor Bulletin: An Introduction to Options ."

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The Risks of Options Assignment

Any trader holding a short option position should understand the risks of early assignment. An early assignment occurs when a trader is forced to buy or sell stock when the short option is exercised by the long option holder. Understanding how assignment works can help a trader take steps to reduce their potential losses.

Understanding the basics of assignment

An option gives the owner the right but not the obligation to buy or sell stock at a set price. An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice:

Short call assignment: The option seller must sell shares of the underlying stock at the strike price.
Short put assignment: The option seller must buy shares of the underlying stock at the strike price.

For traders with long options positions, it's possible to choose to exercise the option, buying or selling according to the contract before it expires. With a long call exercise, shares of the underlying stock are bought at the strike price while a long put exercise results in selling shares of the underlying stock at the strike price.

When a trader might get assigned

There are two components to the price of an option: intrinsic 1 and extrinsic 2 value. In the case of exercising an in-the-money 3 (ITM) long call, a trader would buy the stock at the strike price, which is lower than its prevailing price. In the case of a long put that isn't being used as a hedge for a long stock position, the trader shorts the stock for a price higher than its prevailing price. A trader only captures an ITM option's intrinsic value if they sell the stock (after exercising a long call) or buy the stock (after exercising a long put) immediately upon exercise.

Without taking these actions, a trader takes on the risks associated with holding a long or short stock position. The question of whether a short option might be assigned depends on if there's a perceived benefit to a trader exercising a long option that another trader has short. One way to attempt to gauge if an option could be potentially assigned is to consider the associated dividend. An options seller might be more likely to get assigned on a short call for an upcoming ex-dividend if its time value is less than the dividend. It's more likely to get assigned holding a short put if the time value has mostly decayed or if the put is deep ITM and close to expiration with a wide bid/ask spread on the stock.

It's possible to view this information on the Trade page of the thinkorswim ® trading platform. Review past dividends, the price of the short call, and the price of the put at the call's strike price. While past performance cannot be relied upon to continue, this information can help a trader determine whether assignment is more or less likely.

Reducing the risk associated with assignment

If a trader has a covered call that's ITM and it's assigned, the trader will deliver the long stock out of their account to cover the assignment.

A trader with a call vertical spread 4 where both options are ITM and the ex-dividend date is approaching may want to exercise the long option component before the ex-dividend date to have long stock to deliver against the potential assignment of the short call. The trader could also close the ITM call vertical spread before the ex-dividend date. It might be cheaper to pay the fees to close the trade.

Another scenario is a call vertical spread where the ITM option is short and the out-of-the-money (OTM) option is long. In this case, the trader may consider closing the position or rolling it to a further expiration before the ex-dividend date. This move can possibly help the trader avoid having short stock on the ex-dividend date and being liable for the dividend.

Depending on the situation, a trader long an ITM call might decide it's better to close the trade ahead of the ex-dividend date. On the ex-dividend date, the price of the stock drops by the amount of the dividend. The drop in the stock price offsets what a trader would've earned on the dividend and there would still be fees on top of the price of the put.

Assess the risk

When an option is converted to stock through exercise or assignment, the position's risk profile changes. This change could increase the margin requirements, or subject a trader to a margin call, 5 or both. This can happen at or before expiration during early assignment. The exercise of a long option position can be more likely to trigger a margin call since naked short option trades typically carry substantial margin requirements.

Even with early exercise, a trader can still be assigned on a short option any time prior to the option's expiration.

1 The intrinsic value of an options contract is determined based on whether it's in the money if it were to be exercised immediately. It is a measure of the strike price as compared to the underlying security's market price. For a call option, the strike price should be lower than the underlying's market price to have intrinsic value. For a put option the strike price should be higher than underlying's market price to have intrinsic value.

2 The extrinsic value of an options contract is determined by factors other than the price of the underlying security, such as the dividend rate of the underlying, time remaining on the contract, and the volatility of the underlying. Sometimes it's referred to as the time value or premium value.

3 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the underlying asset's price is above the strike price. A put option is ITM if the underlying asset's price is below the strike price. For calls, it's any strike lower than the price of the underlying asset. For puts, it's any strike that's higher.

4 The simultaneous purchase of one call option and sale of another call option at a different strike price, in the same underlying, in the same expiration month.

5 A margin call is issued when the account value drops below the maintenance requirements on a security or securities due to a drop in the market value of a security or when buying power is exceeded. Margin calls may be met by depositing funds, selling stock, or depositing securities. A broker may forcibly liquidate all or part of the account without prior notice, regardless of intent to satisfy a margin call, in the interests of both parties.

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled  Characteristics and Risks of Standardized Options before considering any options transaction. Supporting documentation for any claims or statistical information is available upon request.

With long options, investors may lose 100% of funds invested.

Spread trading must be done in a margin account.

Multiple leg options strategies will involve multiple commissions.

Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Dividends and Options Assignment Risk

April 25, 2023
Options and Derivatives

Dividend risk refers to the possibility that an option may be exercised early due to an upcoming dividend payment. This typically occurs when a short call is in-the-money and the dividend payment exceeds the remaining extrinsic value of the option. Traders holding these short calls face the risk of being assigned early and owing the upcoming dividend.

Positions Subject to Dividend Risk

What is an ex-dividend date, dividend risk examples, owing the dividend after assignment.

Any positions with a short call are susceptible to dividend risk. The greatest risk of assignment lies with short, in-the-money calls where the dividend amount is greater than the extrinsic value left in the contract.

For example, let’s say you sold a $50-strike call and the stock has an upcoming dividend of $0.50 per share ($50 total). With the stock currently trading for $52.00 a share, and the call trading at $2.25, we would see the remaining extrinsic value is $0.25 ($52.00 – $2.00 intrinsic value ).

Since the dividend outweighs the remaining extrinsic value, we would be at significant risk of being assigned before the ex-dividend date. As the seller, you expect to be assigned the day prior to the ex-date and be forced to sell 100 shares of stock to the holder of the long call.

The ex-dividend date, also known as the ex-date, is the date on which a stock begins trading without the right to receive the upcoming dividend payment. In other words, if an investor purchases the stock on or after the ex-dividend date, they will not be entitled to receive the declared dividend. Conversely, if an investor owns the stock before the ex-dividend date, they will be eligible to receive the dividend payment.

It’s important for several reasons:

Dividend Eligibility : As mentioned earlier, the ex-dividend date determines the eligibility of investors to receive the upcoming dividend payment. Those who own the stock before the ex-dividend date will receive the dividend, while those who purchase the stock on or after the ex-dividend date will not.
Stock Price Adjustment : On the ex-dividend date, the stock’s price typically drops by an amount approximately equal to the dividend payment, reflecting the fact that new buyers will not receive the dividend. This price adjustment is usually done by the exchange and helps maintain a level playing field for buyers and sellers.
Options Trading and Dividend Risk : For options traders, the ex-dividend date plays a significant role in assessing and managing dividend risk. As discussed earlier, options that are in-the-money and have a dividend payment exceeding their remaining extrinsic value are at a higher risk of early assignment.

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Let’s consider a couple of hypothetical scenarios to really drive the point home.

Low Dividend Risk

In this first example, let’s assume you sold a short call against ABC Corp. The details of the trade are as follows:

Stock: ABC Corporation
Call Option Expiration Date : June 15th
Strike Price: $40
Current Stock Price: $42
Ex-Dividend Date: June 1st
Dividend Payment: $0.25 per share

In this case, the call option is in-the-money as the current stock price ($42) is higher than the strike price ($40). With the ex-dividend date approaching (June 1st), there is a possibility the holder of the call may exercise early to capture the $0.25 per share dividend.

To determine the risk, we need to look at the remaining extrinsic value of the call option. Suppose the option is currently trading at a premium of $4.50, with an intrinsic value of $2.00 ($42 stock price – $40 strike price). This means the extrinsic value of the option is $2.50 ($4.50 premium – $2.00 intrinsic value).

In this situation, the dividend payment ($0.25) is significantly less than the remaining extrinsic value ($2.50) of the call. Because of that, the risk of early assignment is incredibly low. It’s unlikely the holder of the call would forfeit the remaining extrinsic value just to capture the much smaller dividend payment.

High Dividend Risk

In this next example, let’s assume you sold a call against XYZ stock. The details of the option are below:

Stock: XYZ Corporation
Call Option Expiration Date: May 20th
Strike Price: $50
Current Stock Price: $53
Ex-Dividend Date: May 10th
Dividend Payment: $1.50 per share

In this example, the call you sold is $3.00 in-the-money and with an upcoming dividend there’s a possibility of being assigned prior to the ex-dividend date.

To determine the level of assignment risk, we need to examine the remaining extrinsic value of the call option. If the option was currently trading for a premium of $4.00, it would mean the extrinsic value remaining in the contract is $1.00 ($4.00 premium – $3.00 intrinsic value).

In this example, the dividend payment ($1.50) exceeds the remaining extrinsic value ($1.00) of the call option. Consequently, there is a high risk of early assignment, as the holder of the long call may decide to exercise the option before the ex-dividend date to capture the dividend payment.

As the holder of a short call, you would be obligated to deliver the underlying stock and pay the dividend if the option is exercised early. To manage this risk, you might consider closing the option entirely or rolling it to a new expiration less likely to be assigned.

When a short call is assigned early due to an upcoming dividend, the seller of the call is obligated to pay the dividend to the buyer. This is because whoever owns the underlying shares, in this case, the owner of the long call, is entitled to receive the dividend if they own the stock on or before the ex-dividend date.

Since the seller of the call must deliver the underlying shares upon early assignment, they effectively become the seller of the shares. As the seller, they are no longer entitled to the dividend payment and must pay the dividend to the buyer (long call holder) who is now the owner of the shares.

Options assignment risk refers to the possibility of an option holder exercising their option early, forcing the option seller to fulfill their obligation. This risk is particularly relevant when dealing with options on dividend-paying stocks.

Dividends can increase the likelihood of early exercise for call options, as option holders may choose to exercise their options before the ex-dividend date to capture the dividend payment. This increases the assignment risk for the option seller.

You can manage options assignment risk by monitoring dividend announcements, rolling your options to different strike prices or expiration dates, or closing your options positions before the ex-dividend date.

No, put options are not subject to early assignment due to dividend risk. That doesn’t mean puts can’t be assigned early, just that dividends have no impact on the likelihood of assignment on a put.

Options assignment risk applies to American-style options, which can be exercised at any time before expiration. European-style options, on the other hand, can only be exercised on the expiration date.

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COMMENTS

Understanding options assignment risk
Understanding assignment risk in Level 3 and 4 options strategies. With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned, either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a ...
Dividend Assignment Risk: Short Call Options
Either way, they've secured a risk-free profit of at least $28. The short call option seller is required to pay the $72 dividend on the payment date since they were short shares on the ex-dividend date. Remember, option assignment is random and can happen at any time for options with any moneyness. Out-of-the-money calls can also be assigned.
Dividends and Options Assignment Risk
Because the risk of being assigned on an option contract is higher when the underlying security of an in-the-money option starts trading ex-dividend. To understand the risks and how dividends impact options contracts, let's explore some potential scenarios. ... The other option is to close out his short position and write a new covered call ...
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Options trading carries risk and requires specific approval from an investor's brokerage firm. ... An investor who is assigned on a short option position is required to meet the terms of the written option contract upon receiving notification of the assignment. In the case of a short equity call, the seller of the option must deliver stock at ...
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An option gives the owner the right but not the obligation to buy or sell stock at a set price. An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice: Short call assignment: The option seller must sell shares of the underlying stock at the strike price. Short put ...
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A limited risk option spread, like a debit spread, credit spread, covered call, or iron condor, is built by writing (selling) options, and at the same time, buying (long) different options to create the desired options strategy. When you write options, either naked or covered within a spread, those options are at risk of being exercised by the ...
Everything You Need to Know About Options Assignment Risk
How Early Assignment Doesn't Change Your Position's Maximum Risk. Perhaps you collect $2.00 in premium for shorting an ABC $50/$55 bear call spread. In other words, we're short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50. Before considering early assignment, let's determine our maximum risk on this call ...
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An option buyer holding a call or put has the right to exercise that option at any time to take delivery of the long (Call) or short stock (Put). The option writer is always at risk of early assignment at any time through expiration for American-style options. There are several types of assignment risk factors you should understand:
Short Call Options Strategy (Awesome Guide w/ Examples)
The breakeven price for a short call option strategy is the short call strike plus the premium received. For example, if a stock is trading at $120 and the trader sells a $125 call option for a premium of $2.50, the breakeven price would be $127.50. Keep in mind that is the breakeven price at expiry. The trade could be in a loss position at ...
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The short call strategy has early assignment risk. If the stock price is above the strike price of the short call, a decision must be made if early assignment is likely. If you believe assignment is likely and you do not want a short stock position, then appropriate action must be taken. Before assignment occurs, the risk of assignment can be ...
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A short call will incur losses if the call closes above the breakeven zone at expiration, which is defined as the short call strike plus the credit received upfront for selling the call contract. Please be mindful of assignment risk for ITM short option as assignment can happen at any time up to the expiration date.
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In other words, we're short the $50 call for a credit of $2.50 and long the $55 call, paying a debit of $0.50. Before considering early assignment, let's determine our maximum risk on this call spread. The maximum risk for a bear call spread is the difference between the strike minus the net credit you receive.
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A short call is a key strategy in options trading, wherein the trader—termed the "writer"—sells, or "writes," a call option. This means the trader assumes a commitment to sell the underlying asset—whether it's stock or a commodity—at a predetermined price, known as the strike price, should the option's buyer choose to ...
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A short call assignment results in selling the underlying stock at the strike price. ... A note on pin risk: It's not common, but occasionally a stock settles right on a strike price at expiration. So, if you were short the 105-strike calls and XYZ settled at exactly $105, there would be no automatic assignment, but depending on the actions ...
Short Call Strategy Guide [Setup, Entry, Adjustments, Exit]
The risk will be reduced by the amount of credit received but is still undefined. For example, if a short call with a $100 strike price has a May expiration date, the position could closed and reopened with a June expiration date. If the adjustment receives $2.00 of premium, the break-even point is extended to $107.
Covered Call Assignment
This is where a Short Call can have dividend risk. That means that the Call buyer may want to exercise their Option to get into a Long stock position to get the dividends. So in this scenario, your Call Option's value is the same as scenario 1 which is $6.00: ... Hence, it's for the Covered Call to get assigned in this scenario. Scenario 4 ...
Assignment Risk, Short Calls, And Ex-Dividend Dates
Assignment Risk, Short Calls, And Ex-Dividend Dates. May 14, 2023 by Vance Harwood. If you are short call options in a stock or an Exchange Traded Product (ETP) like SPY or IWM you need to be aware of ex-dividend dates. If your calls are in the money, even barely, your options may be assigned right before the security goes ex-dividend—and ...
Short Calendar Spread with Calls
While the long call in a short calendar spread with calls has no risk of early assignment, the short call does have such risk. Early assignment of stock options is generally related to dividends, and short calls that are assigned early are generally assigned on the day before the ex-dividend date. In-the-money calls whose time value is less ...
Short Options Are Rarely Assigned. Here's Why
Assignment Risk Odds. This assignment risk, however, is often minimal and can be mitigated entirely if you understand the product you are trading. In this article, projectoption takes a deep dive into option assignment and shows why this common fear for investors short call and put options rarely materializes. At the heart of the rationale ...
What Is a Short Call in Options Trading, and How Does It Work?
Short Call: A short call means the sale of a call option, which is a contract that gives the holder the right, but not the obligation, to buy a stock, bond, currency or commodity at a given price ...
The Risks of Options Assignment
An assignment forces the short options seller to take action. Here are the main actions that can result from an assignment notice: Short call assignment: The option seller must sell shares of the underlying stock at the strike price. Short put assignment: The option seller must buy shares of the underlying stock at the strike price.
Dividends and Options Assignment Risk
Positions Subject to Dividend Risk. Any positions with a short call are susceptible to dividend risk. The greatest risk of assignment lies with short, in-the-money calls where the dividend amount is greater than the extrinsic value left in the contract.. For example, let's say you sold a $50-strike call and the stock has an upcoming dividend of $0.50 per share ($50 total).
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Understanding assignment risk in Level 3 and 4 options strategies

Credit call spreads

Short (naked) call

Here's a call example

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All spreads that have a short leg

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Short Call Options Strategy (Awesome Guide w/ Examples)

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