Exercise and Assignment

“What if I get assigned on my short UVXY Calls?” is a common concern for options writers. Let’s look at the risks and realities of option rights.

First the mechanics. Sold Calls represent a short bias and upon assignment, you will have -100 (short) shares per contract assigned. Sold Puts represent a long bias and upon assignment, you will have 100 (long) shares per contract assigned.

The most pressing thought is that being assigned will change your exposure. The short answer to that is no it will not, however your broker might not allow you to short shares (none available) or possibly increase your margin requirements. But in no case would your notional exposure change.

Holders of options rarely exercise them when significant premium remains. This means that if the extrinsic on a contract you’ve written drops to only a few pennies, it is at high risk of being assigned to you.

I’ve been assigned! What do I do now?

Being assigned effectively means that all of the extrinsic you’ve sold has now been collected leaving only the intrinsic between spot and the strike you sold. You can then easily switch this back to a short option position with a covered sale. In the case of short shares in your book, sell a Covered Call (long shares, short Call) and in the case of long shares in your book, sell a Covered Put (short shares, short Put) You’ll need to make sure the new option contract has sufficient extrinsic (more distant expiration or closer strike) or you’ll be at the same risk of assignment

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