Assigned Initial Made Easy

Assigned initial

hey everybody welcome to the video thank you so much for joining us today today we're talking about option assignment now i would venture to say that option assignment is probably one of those terms that every brand new options trader is like thinking about every time they sell a credit spread they sell a butterfly uh they're like oh my gosh what happens if this this short position gets in the money am i gonna get assigned on it uh what do i do and i know that was a concern for me uh when i first started learning how to trade options is you know what do i do if i get assigned on one of these positions am i gonna have to come up with the money um is am i gonna get a huge loss in my account uh immediately i mean how does this work so so maybe you're here on this video because you got uh an email from your broker like i did in fact i got a couple of emails like this uh this year and let's just you know you might get something like this in your inbox and it says dear valued client we want to let you know that your account uh has been assigned the following position you can see that i was assigned the the 73 call option there in iyr and then earlier this year i was also assigned the 24 put position that i was in in xop guys look look i'm still here i'm still here i got to sign stock is it as scary as we all think it is no in fact i have been assigned stock uh many times does it happen all the time absolutely not uh but it's a it's a it's a reality and you know if you're trading short positions and options at some point it's inevitable you're going to get a sign but let's just talk about it here is this something that we should be worried about uh well depending on your strategy that you're using like if you're selling a naked call option uh and it's deep in the money i'd be i'd be a little bit worried about it but is this something that we um you know need to be like laying in bed at night if we have a spread on if we're trading a spread trade uh like a credit spread and our call option just barely went in the money is this something that we should be concerned about um and the answer uh for me is uh is no i would say we do not need to be worried about it it's something that we need to be aware of it's something that we need to understand what we need to do if we do get assigned but guys if you're trading it in like the form of a spread it's it's really no big deal so we're going to talk about it here so just to kind of put your mind at ease let's just break it down we're going to talk about the call side the put side the different obligations that we have and we'll just talk about what we need to do if we do get assigned so first of all what is an option assignment or early assignment well an early assignment is just an assignment that happens uh before expiration so an option assignment is simply means that the owner so the call buyer the call the put buyer the owner of an option contract has simply decided to exercise their right remember a buyer has their right they can buy stock they can use that option to buy stock or they can use that option to sell stock it's their right it's their prerogative it's their on their time frame if they're trading an american style option they can exercise that option anytime up until before expiration uh if they're like a european style option which uh you know most of the options that i trade are basically uh they're american style options but if you're trading a european style option you have you can only exercise it on expiration so let's talk about the rights of a buyer of an option of a call option so the owner of a call option has the right but not the obligation to buy stock at the agreed upon price so let's just run through an example here real quick let's say we're trading twitter and twitter is trading at fifty dollars uh and we have the forty dollar call option or the buyer has the forty dollar call option now that forty dollar call option gives the right to the buyer to buy twitter stock at forty dollars even though stock is trading at fifty dollars so if he exercised that right he could buy twitter at forty dollars even though it's trading at fifty now you might have sold this position to him in the form of a spread maybe you entered a spread trade and you sold the 40 strike and you bought the 45 dollar strike so you could see that here's the call buyers side he just bought a call option and you sold it to him in the form of a spread so what if you got assigned on that 40 call option well if you got a sign on that forty dollar call option that would leave you as the seller of that call option short uh 100 shares of twitter in your account uh for every uh every contract that you sell so if you sold two two contracts you'd be short 200 shares and so forth so you know that's the that's what happens i just want to run through these real quick the basics of it um as the call as a call option buyer and a call option seller and a put option buyer and a put seller because it's going to look different in your account if you get assigned a call option so in the form of a call option you're going to be short 100 shares of stock now if you're a put buyer the put buyers rights are as follows so the owner of a put option has the right but not the obligation to sell stock at an agreed upon price so in this example let's use a walmart so let's say you were short the 165 put and the stock is now trading at 143. so your short put is now in the money and you can see that the walmart stock there is trading at 143. you're short the 165 put and let's look at it from the buyer's side so the buyer is looking at his uh side of the trading platform and he sees that he's long the 165 put well what does that mean that means he has the right to sell stock right he has the right to sell stock at 165 dollars well that's pretty good because the stocks now trading at 143. so if the buyer of that put decided to exercise his option and sell stock at 165 you as the put seller are on the hook and you're going to have to fulfill that obligation and and buy stock from him at 165 so this would leave you long walmart stock in your account at 100 shares so just kind of looking at it from both sides if you're short the call option and you get assigned you're going to be short shares if you're short a put option in your account and you get assigned you're going to be long shares of stock now just real quick i just want to kind of break it down and talk about why we trade spreads so if you're selling naked calls and puts that leaves you open to a lot of a lot of risk so when you're selling a naked call option that is actually one of the riskiest trades that you can do because you're you're basically have an undefined amount of risk to the upside because that stock can and definitely go to the upside so if you're short a certain amount uh let's say you're short 100 dollar stock or a hundred dollar call option and that stock is now trading at 150 well you are short 100 one at the 100 strike but you're you know if it was exercised at 100 you're gonna have to actually go out and buy that stock at 150 in order to make it right with your broker because what happens is when you get a signed stock uh the call buyer exercised his right so the broker says hey all right you exercised your right here's your 100 shares and now they're coming to me as the as the short seller of that call option saying hey mr seller we delivered 100 shares of uh walmart twitter stock to your buyer and now you owe us because we've already delivered that stock to him so now you're short in your account well you owe your broker some stock because you borrowed that stock to give it to that to give it to that buyer so now that now the broker's coming to you and saying hey mr buyer or mr seller we already delivered that stock you need to give it back to us and you're like oh my gosh well i don't even have any twitter stock i got to get some twitter stock so you go out on the open market and whatever it's trading at on the open market well that's what you're gonna have to buy it at you're gonna have to go out on the open market and grab that stock and put it in your account to make your to make yourself whole or or straight straight or square with your broker so now when you're trading naked naked put options it's a little bit different because when you're assigned on a put option you actually have long shares of stock in your account so there's a couple of things you can do if you're if you're assigned a put option is number one if you don't have the money in your account you can actually just you know put the money in your account if you want to hold that stock you can just put that money in your account the same thing with a put option you're putting yourself if you're trading a naked put you're putting yourself at a risk in that you have undefined risk to the downside and it's only defined by that stock going to zero so if you're trading a 300 stock and theoretically it means the stock dropped to drop to zero uh you're you're on the hook for that 300 difference times 100 so that could be a huge loss so that's why we like to trade spreads and you can see that most traders will trade spreads if they're trading short options it will define it will help define your risk so let's talk about it we got we went through all that just to get to this point and i i wanted to do that because i wanted to show you what it looked like on both sides of the options chain but the call side or the put side so let's just say that first off um just because an option goes in the money does not mean it's automatically going to get assigned i i've heard so many people to say you know i've sold a short put or i've sold a short call and uh i'm you know as soon as it goes in the money am i going to get assigned on it no you're not going to get a sign on it in fact in fact in some time in some cases it's not going to even be logical or even in the best interest of the owner of that put or the owner of that call to exercise their right because anytime they exercise their right to buy that stock they're going to lose any extrinsic value that's left in that option so any option that is just inside the money has quite a bit of extrinsic value so to in order for them to exercise that it's going to it might even cost them money to actually might cost them more money to exercise that call or exercise that put than just to sell the contract so it might not be in the best interest for them to you know to exercise that right now if the stock is deep in the money or that option i should say if that option is deep in the money then there would be a lot less extrinsic value in that option or if that option is closer to expiration then there would be less extrinsic value so really only you know if it's deep in the money or real close to expiration is it really at risk of assignment now by saying that i should say that an option can be assigned at any time but the chances of it are are less the further out from expiration and the closer to at the money it is uh so just to kind of keep in mind that there so you know about ten percent decide this ought to ease your mind a little bit here that only 10 of all options ever get assigned and most of those are on the week of expiration so that ought to put your mind at rest right there guys and if you're if this is your first time here and you're just learning about options my name is kirk with tactical options trading and we make videos just like this where we talk about options we talk about the stock market if you're interested in learning more just make sure that you click that subscribe button make sure you click that bell so that you don't miss out on any future content and if you're liking what you're getting right here please smash and smash that like button we'd love to uh we'd love to have you guys on board if you like what you're seeing here so let's talk about what do you do if you get a sign on a short call position so in the case of a short call remember you're going to be short shares of stock in your account we kind of already talked about this here but if you're short shares of stock uh the broker has already delivered that stock to the person to the call buyer who exercised their right now the broker says hey you owe us and they have you have a short position in your account and to make yourself straight with your broker or write with your broker you're going to have to go out and purchase stock and put that in your account to make that transaction complete so to fulfill your obligation there are a couple of things that you can do so number one this is what we already talked about you can go buy shares on the open market and return them to your broker now if you are in a spread which we talked about earlier and this is why we trade spreads because it defines your risk so you can exercise your long option in the case of a spread and fulfill your obligation to your broker so right now we're looking at an options chain of twitter now this is the same example that we used earlier and you could see that we were short the 40 call option we were long the 45 call option and let's say that we got assigned that 40 dollar call option um so what we would do uh in order to make it right we're short in our account we're going to have to go out and buy stock and make that right with our broker so instead of going out and buying stock at 50 we have the right we bought the right you can see that there we bought the right to own that stock at 45 so we could go out and exercise that right and buy that stock at 45 instead of buying it at 50 and that helps to mitigate our risk or help us mitigate our loss by trading that defined risk spread so instead of going out and buying it at 50 we can now buy it at 45 we deliver those back to our broker and we're we're even steven or square now i wanted to throw this in here too now this isn't a spread that i would normally trade because it's not real i mean it's a 48 60 spread but i just wanted to put this on here to show you what would happen if we were assigned uh while the stock is trading between our two strike prices so you can see that let's say for example we got to sign that 48 strike and the stock is now trading at 50. well we own the right to buy stock at 60. so it wouldn't make sense in this case if we got assigned on that 48 dollar call option it wouldn't make sense to exercise our sixty dollar call option and go out and buy stock at sixty because we have the right to do so why don't we just go out and buy stock at the at the asking price of fifty dollars right now and that would square us up with the broker and then we would actually just could go out and sell that 60 strike and capture and keep that money that's still left in that option right there so if if we do get a sign and this and the price of the stock is between your two strikes it might be the in your best interest just to uh just to go out and buy the stock at the actual price and then just sell your option contract your long option and capture that difference there so that was talking about the call side and guys i know we're just kind of blasting through this here i kind of like to make these videos short and sweet but if i'm not answering your questions or you didn't get your questions answered just comment in the section below i'll make sure i answer your question and uh hopefully this is making sense to you guys but what if we get a sign on our short put so in the case of a short put remember we were assigned stock so somebody exercised their right to sell stock which means we're obligated to buy that stock from them so we are long shares of stock in our account so if you if you're still bullish on your position so because if you sold a put you're basically expecting that stock to go up now if you're still bullish on your position and you were assigned stock well you now have the stock in your account so you could just say well i still i still believe in my position but i just have the stock now if you want to hold that stock all you got to do is just come up with the money and if you don't have the money in your account then it's going to be called a margin call you're going to get a margin call from the broker they're going to say hey you got stock in your account but you don't have money in your account to pay for that so you now have a margin call so you're gonna either have to put that money in your account or you're gonna have to just sell the stock uh one of the two so you could keep it as long as you put the money in there uh if you don't wanna keep it or carry the stock and you don't have the money you can just simply reverse the trade and sell the stock on the open market and get out of the trade or just close that trade so here we are looking at a uh what it looks like on you know if we were to sell a spread on a short a short put spread so let's say we were short the 165 and we were long the 155. let's say we got assigned that 165 put well we have the right to sell stock at 155 so if we were assigned that 165 put what that was what that's saying is if somebody assigned that 165 put we have to buy that stock from them at 165. now if we don't have the money in our account we're gonna have to sell that stock right so to sell that stock at 143 would really be kind of a loss for us if we if we had to buy the stock at 165 but we had to sell it at 143 but actually buying that uh that position there that 155 long position that gives us the right to to sell stock at 155. so instead of selling it down here at 143 we could sell it at 155 which helps cap the losses to the downside if we're selling that as a a spread so guys i hope this has all been uh helpful to you i hope you understand uh that it's not that big of a deal if you get assigned on one of your uh call positions or one of your uh put positions uh we've gone through the different scenarios here and i know we really just kind of blasted through it but i just the point of this video is that if you're trading a spread um you're protected already and it's not something that you have to lay in bed and worry about at night and in the broker they understand that you're trading these positions and you might not have the money in your account if you do get assigned but they say hey you know you got one day you got a day to get this money in your account so either you can sell the stock if you're long that stock you can just sell it or if you're short stock you can just buy it back so to close that trade and uh so just you know don't worry too much about it especially if you're trading a spread but just know that it can happen and if you've been assigned stock and you're you know or if you're not you don't have all your answers uh in this video here just please comment down in the comment section below i'll make sure i answer all your questions i appreciate you guys uh watching our videos and hopefully these have been helpful and if yeah like i said before if you have any questions comments just post them down below and see that subscribe button right there if this video has been helpful uh and you want to learn more about this kind of stuff please hit that subscribe button and uh make sure you smash smash that like button